Macroscope | What the rise and fall of oil prices says about asset markets

Hannah Anderson says the dip in prices in October after steady increases all year was due not so much to changes to the fundamentals, but new expectations. Markets move on investors’ risk perceptions, even if they’re not based on reality

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Oil pours from a spout at Edwin Drake’s original 1859 well that launched the modern petroleum industry at the Drake Well Museum and Park in Titusville, Pennsylvania, US. The factors driving lower oil prices in October and November are likely to fade as supply constraints bite. Demand remains solid and is likely to hold up as global growth continues. Photo: Reuters

Published: 11:15am, 16 Nov 2018Updated: 10:19pm, 16 Nov 2018

Risk assets have faced a good number of difficulties this year, but one of the few assets bucking that trend is oil. Modest global growth kept demand stable, while suppliers continued to exhibit caution around increasing production – many still no doubt wary of creating a glut similar to the one seen in 2015 and 2016 (and the accompanying low prices). As a result, investors pushed oil prices higher in the first 10 months of the year.

Indeed, oil was one of the top performing assets at the end of October. Through to October 31, prices for a barrel of West Texas Intermediate (WTI) Crude (an oil benchmark) rose by 8 per cent, while global equity prices fell by 3.9 per cent.

Global growth, though modest, seemed likely to continue. Supply looked as though it may even tighten on the back of continued discipline by Opec producers. Additionally, the re-imposition of sanctions on Iran, which the US applied on November 5, ostensibly for violations of its 2015 nuclear agreement, created expectations for even lower supply. The conditions seemed in place for a rally in oil prices through to the end of the year.

Anyone who has paid attention to markets recently knows what happened next – oil prices fell for the longest stretch since 1977. Twelve straight sessions (October 29 through to November 13) of price declines erased this year’s gains. WTI’s price drop of 7 per cent on November 13 alone was its eighth largest daily decline since 2010.

Oil prices are extremely volatile and it doesn’t take much to move markets. Yet, all of the conditions supporting higher prices mentioned earlier remain in place. What has changed are expectations.