As Brent crude prices approach $30 per barrel (incidentally WTI dropped just below into the 20’s overnight) traders, buyers, producers and commentators are asking where the bottom of the barrel is. To think about how and why crude might bottom its worth looking back 12 months to the 13th January 2015 as that was when oil prices fell below $47 per barrel after falling precipitously from over $115 per barrel just 7 months before. Oil prices then rebounded to over $65 per barrel by mid-May.
As investors, traders, buyers and sellers try to anticipate when the bottom will occur lets look back at where we were 12 months ago. What was the spark that caused oil prices to rebound? Although its always difficult to ascribe reason to volatile price movements there are some clues. Back in early 2015, signs of production cuts (specifically a decline in the rig count) from US shale producers and a more relaxed outlook to growth in China resulted in the oil price rising by almost 40% in the space of a few months.
Developments in the US natural gas market show how things can turn around very quickly. Natural gas prices fell below $1.60 per mmbtu in Dec before then rebounding by around 60% in the space of a few weeks. Given the record number of hedge fund short Brent/WTI positions we only require a catalyst in contrast to the current apocalyptic narrative that is sweeping markets for the oil price to see a sizable rebound and very quickly.
Historically, oil prices have tended to bottom out in January before rising through to April/May as demand increases. Will it do the same this year?Remember, as Herbert Stein once said “If something cannot go on forever, it will stop.”