Demand factors in the collapse of oil prices: The price of oil passed another milestone last week, falling below $50 a barrel, a level that I had not expected to see again in my lifetime.
It’s interesting that we crossed another milestone last week, with the yield on 10-year Treasury bonds falling below 2%. That, too, is something I had not expected to see.
And these two striking developments are surely related. I attribute sinking yields to ongoing weakening of the global economy, particularly Europe. And slower growth of world GDP means slower growth in the demand for oil. Other indicators of an economic slowdown outside the United States are falling prices of other commodities and a strengthening dollar.
A month ago I provided some simple analysis of the connection between these developments... The price of oil has fallen another $8/barrel since then, prompting me to update those calculations. ... On the basis of the above regression,... of the $55 drop in the price of oil since the start of July, about $24, or 44%, seems attributable to broader demand factors rather than anything specific happening to the oil market. That’s almost the same percentage as when I performed the calculation using data that we had available a month ago.
So what’s been happening on the supply side of oil markets is important. But so is what’s been happening on the demand side. ...