THE PERFECT STORM 87A lot of investors tend to extrapolate from whatever is
going on. Behavioral psychologists have a name for this. It’s
called “recency bias”.
We tend to be over influenced by whatever happened re-
cently, and forget about the bigger picture. When the price of
oil goes from $100 to $60, which as I said is extreme, people
say: “Now it’s going to go to $50, then it’s going to go to $40
and then, soon after, to $30.
You can’t rule anything out, but it does look as if oil is
going to oscillate around $60. That’s still a big deal and will
cause damage to junk bonds and a lot of other markets.
Why do I say $60? It’s not because I think I’m smarter than
a lot of other analysts. And I don’t have a crystal ball. But I did
have the opportunity to speak to various people in the industry.
There are no guarantees; of course. I want to be clear
about that. I suppose the price of could go below $60, but it
does look like it’s going to settle around $60.
I want to explain the reasons why, because I don’t like to
write things that have a categorical tone without providing the
backup. This didn’t just come out of the blue.
Obviously, Saudi Arabia is the marginal supplier. They can
dial up the supply or dial it down. They’re well aware of what’s
going on in the rest of the world. They see the fracking and US
oil output.
They also see that the US is now the world’s largest energy
producer and is close to becoming a net oil exporter. Yet, even
if we give the US credit for being a stronger than some of the
other economies, there’s no question about the global slow-
down. Therefore, Saudi Arabia sees demand slowing down.
It’s something you learned the first day in economics: supply
is up because of fracking technology, and the demand is down
because of a slowing economy.
When supply is up and demand is down, you get lower
prices. That’s Econ 101. But the question is: how much lower