We are only three months into 2016 and we have already seen oil prices take a rollercoaster ride. The chart above puts the weakness of recent months in context… prices have collapsed. The extent of the drop is matched only by that during the Great Financial Crisis – something we were assured would never happen again.
The energy market challenge is more about excess supply than sagging demand. The market rumour mill would have us believe that the world’s storage tanks are full. If so, then a lack of storage may exert some (much-needed) production discipline that lower prices could not.
More broadly however, the return of crisis conditions within the energy markets serves to remind us that the macroeconomic and financial market challenges revealed in gory detail during 2008/09 remain largely unresolved, Kames Capital argues.
“Admittedly the global banking system is now on a much sounder footing – that is if you ignore China,” says Kames head of multi-asset investing, Scott Jamieson. “This improvement has however been because the rest of us – through government policies, etc – have absorbed the problem.”
Jamieson believes ballooning oil production, spawned by the easy credit conditions associated with quantitative easing (QE), now needs to go into reverse. And the problems don’t end with oil.
“QE has fuelled a number of other bubbles – look at capital city property prices,” he says. “There is no reason to suppose that the reality checks will be limited to the energy industry.
“It is impossible to put a timetable to these adjustments, but it would be utter folly to deny they will happen. The best solution that policymakers have dreamt up has been to replace one set of bubbles with another. In the short term this has, and will continue to be, a very pleasant experience for those exposed to the bubble ‘cures’. But in the longer term, examples of lightning striking twice will abound.”
