History, logic and market forces say oil prices will rise again

OIL'S rapid decline since August of last year has been dramatic. To listen to some commentators you would also think it is unprecedented and irreversible. Those claiming that oil will continue to fall from here and remain low for evermore, however, are flying in the face of both history and common sense. The question we should be asking ourselves is not if oil prices will recover, but when they will.

From June of 2014 until now, the price of a barrel of West Texas Intermediate (WTI) crude oil has fallen some 57 per cent. As Chart 1 shows, there have been drops of a similar percentage five times in the last 30 years. The rate of recovery has been different each time, but recovery has come. In addition, since 1999 the chart shows a consistent pattern of higher lows. In other words, oil is a volatile market, but prices are in a long-term upward trend.

Charts can only tell us so much, however. Even a long-term trend can be broken if fundamental conditions change, and that, say those predicting that oil will never recover, is what has happened. There is no doubt that supply has increased. Hydraulic fracturing, or "fracking" technology, has unlocked reserves of oil and natural gas previously thought of as unrecoverable. Supply alone, however, doesn't determine price. We must also consider demand, and that has been increasing too.