The 'black swan event' that could send oil to $25 a barrel
Oil's had a pretty good year.
The commodity's seen a nice rally in light of a weaker US dollar, stronger economic data from China, decreasing non-OPEC production, and a continued rise in demand.
Both WTI crude and Brent crude were around $48 per barrel on Monday, well above their lows below $30 per barrel earlier this year.
But all of that may come crashing down if one "black swan event" transpires, argued a Bank of America Merrill Lynch global commodities research team.
From their recent note to clients (emphasis ours):
Global GDP in US dollar terms at market exchange rates is stagnant. Continued US dollar strength could force Saudi Arabia either to cut oil production modestly and push Brent back to $50 or de-peg the Saudi riyal, our black swan event, which could lead Brent to collapse to $25/bbl.
While this certainly sounds ominous for the oil market, it's worth noting that analysts and financiers are split on whether the Saudis will actually de-peg their currency and undo the current fixed exchange rate with the US dollar.
Capital Economics' Middle East economist Jason Tuvey previously argued that his team's long-term view continues to be that the riyal's peg against the dollar will remain intact.
On the flip side, Zach Schreiber, the CEO of PointState Capital who made $1 billion betting against oil two years ago, noted that he's short the currency against the US dollar, arguing that the lower-for-longer oil-price environment and growing costs will ultimately lead the Kingdom to abandon its three-decade old currency peg.
But, as for the dollar, several analysts think that its recovery is just getting started, and that it has more room to advance this year.
As an end note, we should add that it's a bit of a faux pas to call this forecast a "black swan" given that "black swan" risks are, by definition, nearly impossible to see coming.
However, when they materialize, it's bad - and that's the point BAML's commodities research team seems to be making.
- I spent 2 weeks in India. A highlight was visiting a small mountain town so beautiful it didn't seem real.
- I quit McKinsey after 1.5 years. I was making over $200k but my mental health was shattered.
- Some Tesla factory workers realized they were laid off when security scanned their badges and sent them back on shuttles, sources say
- Why are so many elite coaches moving to Western countries?
- Global GDP to face a 19% decline by 2050 due to climate change, study projects
- 5 things to keep in mind before taking a personal loan
- Markets face heavy fluctuations; settle lower taking downtrend to 4th day
- Move over Bollywood, audio shows are starting to enter the coveted ‘100 Crores Club’