Not so long ago oil was as stable as gold and silver. It was available for around $80 a barrel and it looked like it would stay that way or even increase. Then it suffered one of its worst blips in history, and within a mater of months it was down to just $50 and falling. The price of Brent Crude Oil hit another low in December of 2015 and as this article is being written, it has just recovered from a low of $39, which is the lowest it has been in seven years.
There are many factors behind this, but the main one is simply supply and demand. In the third quarter of 2015 the demand was for as many as 2.2 million barrels a day, but in the following quarter that dropped to just 1.3 million barrels. What’s more, it looks like the demand will fall further during the first quarter of 2016, with a demand for just 1.2 million barrels a day.
The trigger for the recent slump was a meeting by Opec, a cartel of the biggest producers. They had intended to reach an agreement to put a cap on production, which, it was hoped, would stabilize the value of this commodity. However, no such agreement was made and no such cap was put in place. In fact, although the demand is lower than it has been in a long time, and although the price is the lowest it has been since 2008, Opec produced more barrels of oil in November of 2015 than they have done in any month since November 2008.
It doesn’t take an economic expert to see the problem here. Commodities rely on supply and demand, the bare essentials of a strong marketplace, and when the supply outstrips the demand many times over, then the value drops. The rarer something is, the more it costs because the harder it is to acquire. The more common something is, the easier it is to acquire and the cheaper it becomes. In the case of crude oil, it seems they might as well be giving the stuff away.
The situation becomes even more bleak and even more incomprehensible when you put a figure on it. The demand may only be for 1.3 million barrels a day in the final quarter of 2015, but the amount being produced exceeded 32 million barrels a day. This means there is a huge excess, and this is why many experts are predicting that the price of Brent Crude Oil could fall further still, potentially to as little as $20 a barrel. This is a good thing for the consumer at the pumps, but it doesn’t bode well for many major economies, many investors and for the biggest oil producers in the world.
What’s more, the price of oil also has an effect on the price of gold and other metals.
What Does This Mean for Precious Metals?
If oil is lower, then inflation is low, and this is not a good sign for gold, silver or any other precious metal. The main reason people invest in these metals is because they consider them to be a guard against inflation, so if inflation is low, then the demand for them will likely decrease. Also, when oil is low people spend more, particularly in the US. This is great news for equities and for the economy in general, but it’s not great news for gold or silver.
This doesn’t just apply to physical gold and silver, but also to precious metal stocks and to ETFs, which tend to suffer when oil suffers.
The differences are not spectacular, but if you look at the price charts for oil and for gold, as an example, then you will see that there is a direct coloration. When oil is on the increase, gold tends to do well, when it drops, so does gold. In fact, 2015 is a prime example of this, because gold has been steadily falling all year, reaching one of its lowest points since 2011, a time when oil also suffered.
So, if you have money in precious metals and are treating the oil market with indifference, it’s worth remembering that when oil suffers, your investment suffers as well.