Weak crude oil prices could be around for a long time, acting as a drag on crop prices.
Oil futures and crop futures do not move in lock step, but the price of crude affects crop prices because of their linkage in biofuel. Also, oil affects crop values because of its looming presence in commodities in general.
This autumn, West Texas Intermediate (WTI) crude is mostly around US$45 to $50 a barrel after bottoming out in late August just below $40.
Crude had been above $100 in the first half of 2014, but it weakened as global surpluses rose.
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Anemic global economic growth has kept demand below earlier forecasts, and the amount of crude on the market is increasing, largely as a result of the nuclear deal with Iran that will scale back international restrictions on that country’s crude exports.
Even as Iran oil starts to hit the world market, the Organization of Petroleum Exporting Countries, dominated by Saudi Arabia, has no intention of restricting its production to lift prices.
It is determined to keep prices low to win back market share from non-members such as the United States, Russia and Canada.
The U.S. Energy Information Administration forecast this month that WTI would average $49 a barrel for this year, down $6 from its forecast this summer.
It expects the price in 2016 to average $54, down $8 from the summer outlook. It sees Brent crude at $54 this year and $59 next year.
U.S. oil production is not falling as quickly as was expected when prices started to fall.
Companies are reducing the number of drilling rigs, and the amount of money banks are willing to lend to finance new wells is drying up.
Production in the U.S. and elsewhere will decline a little next year, but the resulting price support for oil will likely be only modest.
Banks such as Goldman Sachs and Barclays note that investment firms that had heavy short positions this summer (that is, they were betting on the expectation of lower prices) have now mostly rebalanced their positions on the belief that the price low is in.
However, almost no analyst expects a quick revival of prices.
Barclays is more bullish on oil prices than many other big banks.
It sees Brent crude averaging $63 next year, which is little higher than the EIA forecast. Barclays sees $65 in 2017, $74 in 2018 and $83 by 2020, a far cry from the averages of about $100 in 2013 and 2014.
The unexpected can always upset these forecasts. The Mideast is a volatile place, and any escalation in violence would push crude higher.
However, the world seems well supplied with oil, so there is little reason to expect that an oil price rally will be the rising tide that lifts all boats, including crop commodities.
