Brent Crude has taken a 75% nose-dive from its $110 per barrel price-tag in June 2014, but despite its recent bounce to circa $35, McPherson suggests the worse could be far from over.
“$35 oil should, in theory, be good news for companies and good news for consumers, but the reality has been much less pleasant,” he said.
“The low price has been seen as an indicator of low growth and low inflation, with the worst of the sell-off coinciding with the US Fed raising rates. Such dismal reality has prompted doom-monger theories calling for $10 oil; whilst not likely, this is plausible and would have serious consequences for equity markets.”
McPherson singled out the Fed as one of the “playground bullies”, suggesting that it is no coincidence that oil’s 25% fall to $26.50 began post its 16 December announcement to raise rates.
This was followed two days later by the, arguably ill-timed, lifting of the oil export ban after 40 years, which only served to raise supply in an already over-supplied market.
2016 has so far been characterised by spats between Iran and Saudi Arabia, which have diminished hopes of intervention of OPEC supply cuts.
“$10 oil is clearly too low – it would paint a disastrous picture for inflation, equities and global growth,” McPherson continued.
“This picture could well look like a recession if it coincided with further concerns over Chinese growth and a tightening Fed.
“Sadly, $10 oil is possible due to the huge over-supply in the market. We have about sixty-five days’ worth of oil in supply. This number is ever-increasing owing to the 1.5 million excess barrels being produced each day. As over-supply increases, so too do storage costs for producers.”
