Can Australian farmers count on more cost relief from the oil price?

Our agricultural community depends on oil and the recent plunge in price has been a much-needed cost break, but how long will prices remain low?

Oil Price Plunge

Prices started to tank in earnest in the final months of last year, with the WTI crude oil price peaking in 2014 above US$110 and recently falling below US$50. Goldman Sachs is predicting lower oil prices are here to stay, reports Tony Randall on Bloomberg. The bank released an analysis this week confirming the large supply dump flooding the market in the second half of 2014 combined with a fall in demand in December and January.

Why is the Oil Price Falling?

Goldmans have quantified the supply and demand effects by linking the relationship between the US stock index, the S&P 500, with the price of oil. In simple terms, when stocks move in tandem with oil price rises, then oil demand is driving prices since higher stocks indicate a strong economic outlook. When the oil prices and stocks move in opposite directions then the oil price is driven by supply. The relationship was demand driven leading up to the recession of 2008. Supply expectations then remained stable until the beginning of 2012 when US shale oil production started to outstrip expectations. This culminated in last year’s oversupply shock.

Oil Price Outlook

Goldmans is predicting a three-month outlook for WTI crude at US$41, six-month’s at US$39 and a 12-month outlook at US$65. Some US analysts are predicting oil prices will continue to go even lower. Chief oil analyst at Oil Price Information Service, Tom Kloza, has forecast WTI crude could get as low as $30 before it rebounded. Kloza is predicting that it won’t bottom until the second quarter of the year with shale oil to blame. Kloza’s outlook isn’t as low as Citigroup, which have suggested WTI oil could get as low as US$20 a barrel.

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