Why I think the oil price will recover but then crash forever

The oil price has plummeted. I think it will recover, may even soar eventually, before the oil market goes into permanent decline.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The oil price has plummeted. I think it will recover, and may even soar, before the oil market goes into permanent decline.

Oil demand is elastic in the long run. What I mean is that in the short run, demand for oil is roughly the same regardless of price. Or, to put it another way, in the short run, demand for oil is price inelastic.

It takes time to change behaviours

In the longer run, it is different. If the oil price remains high, we start changing our behaviour: buying fuel efficient cars, for example. If the oil price remains high over an extended time-frame, then eventually demand falls and the oil price then drops — in the long run, demand for oil is price elastic.

It is a similar story with oil supply. If the price remains high, oil companies invest more in exploration. Bar a brief interlude immediately after the 2008 crash, the oil price was relatively high, from the middle of the last decade to around 2014,  occasionally going above $100 a barrel. During this period investment into oil surged, for example, the shale oil and gas revolution.

That’s why there’s an oil cycle. The delayed reaction of demand and supply creates extended periods of high and then low prices.

The collapse in the oil price 

Because of shale oil and gas, in recent years the oil price has been relatively modest. Thanks mainly to the coronavirus and also due to a disagreement between Russia and Saudi Arabia on the appropriate reaction to the pandemic, the oil price is currently exceptionally low — Brent Crude is at $33 a barrel.

You don’t need a degree in rocket science to realise that the low oil price will hit oil companies and their respective share prices.

As a result, investment into oil will fall. The longer the crisis lasts – until late spring, later this year, or next year when a vaccination is commonly available – the greater this negative hit on long-term oil supply. When the crisis ends, I expect demand for oil to soar. At that point, I reckon the oil price may even go close to $100 a barrel again.

Short-lived recovery

Just as markets initially underestimated the impact of the coronavirus because they failed to factor in the way it was spreading exponentially, they have failed to price in how exponentially falling costs of renewables and energy storage will transform the energy market.

The combination of the imperative to win the war against climate change combined with the economic transformation of clean oil substitutes will have a devastating and permanent hit on the oil industry.

Demand for oil won’t die away completely. It does, after all, have applications other than as fuel — plastics, for example. But then even the plastic market is being disrupted.

It will have an application as rocket fuel, but you may indeed need a degree in rocket science to understand that business.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After a 96% plunge, is buying more Aston Martin shares throwing good money after bad?

Just two weeks after buying Aston Martin shares Harvey Jones found himself nursing a painful loss. Yet after recent news…

Read more »

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »

Investing Articles

Could I use a stock market crash to turn £20k into half a mil in just over a decade?

A stock market crash might sound terrifying to some but it can also present a once-in-a-lifetime opportunity to accumulate generational…

Read more »

Investing Articles

Recently released: October’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Investing Articles

Here’s how a Stocks and Shares ISA and Lifetime ISA could supercharge my wealth!

Individual Savings Accounts (ISAs) can help UK share investors take their earnings to the next level. And their importance is…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

A high-yield dividend ETF and an investment trust to consider this November!

Investors wanting to boost their passive income could benefit from investigating these high-yield funds and trusts, says Royston Wild.

Read more »

Investing Articles

2 of my favourite, cheap FTSE 100 growth shares this November!

These FTSE 100 growth shares could be great long-term picks to consider, reckons Royston Wild. At current prices he thinks…

Read more »

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »