James, the commodities expert

A James Alexander post

The Market Monetarist view on the reasons for the oil price has been discussed by Marcus NunesDemand fell as global growth has slowed, or at least risen a lot less fast than expected. The demand curve shits to the left as in the chart. But there is another element, supply conditions that have worsened the fall.

The oil supply curve is driven by a lot of things, but two of the biggest are simple cost of production and then the politics of production.

Most commodity cost curves show a long flat line where representing all the existing cheap plays, oil is no exception. And then the curve rises more or less quickly as unconventional or just new, unexplored/low invested capital areas are stuck on the curve. Shale oil is a great example, Artic oil another.

The shape of the cost curve tells us that if the market is in equilibrium on a steep part of the cost curve, a small shift in demand can have quite devastating consequences on the price (Phase One, equilibrium 1 to equilibrium 2).

And then when this happens the politics of oil kicks in as sovereign producers (think Saudi Arabia, Russia and Venezuela) cannot accept for all sorts of reasons less production/less revenues and so shift their production strategies and pump more oil at the lower prices. These changed strategies cause the oil supply curve to shift to the right and the oil price spirals lower (Phase Two, equilibrium 2 to equilibrium 3).

JA Oil

Add the Iraqi, Kurdish and Iranian increases in oil connectivity and it just adds fuel to the fire of falling oil prices and rightward shifting supply curves (pardon the pun).

It’s not the complicated to explain post hoc. Predicting beforehand means predicting monetary policy and the course of international relations, and that´s tough.

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