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

July 5, 2021 0 Comments

first_img Michael Baxter | Thursday, 12th March, 2020 Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge! Image source: Getty Images. See all posts by Michael Baxter Simply click below to discover how you can take advantage of this. Our 6 ‘Best Buys Now’ Shares I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement. 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. 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In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.And right now, we’re giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool. 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.5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…It takes time to change behavioursIn 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 recoveryJust 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. Why I think the oil price will recover but then crash foreverlast_img

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