Let's review why did oil collapse back in 2015 and 2016 and see if we can use the information for today.
Finally, oil has gotten crushed in 2015 and 2016 and remains depressed in 2017. We haven't seen this large of a decline in oil in years as momentum speculators rushed out like someone discovering their Match.com date looks nothing like their picture. Nobody would have guessed oil prices would have declined by 50% over the past 10 months.
Let's try and understand WHY oil prices collapsed so much when global economies are largely recovering.
WHY DID OIL PRICES COLLAPSE?
The US and Canada started drilling more! For years, oil prices were hovering over $100 a barrel until North America decided to ween itself off the dependence of foreign oil. Meanwhile, demand for oil in places like Europe, Asia, and the US began declining at the margin as other forms of energy took off.
By late 2014, world oil supply was on track to rise much higher than actual demand. A lot of unused oil was simply being stockpiled away for later. So, in September 2015, prices started falling sharply.
Low prices are excellent news for oil consumers in places like Japan or the US, where gasoline is the cheapest it's been in years. Low oil prices act like a tax cut for everyone. Unfortunately, oil is big business for a lot of countries like Russia, Venezuela and the OPEC countries.
Amazingly, OPEC hasn't cut production at all. After a meeting in November, 2014, OPEC couldn't quite agree on a response and ended up keeping production unchanged. “We will produce 30 million barrels a day for the next 6 months, and we will watch to see how the market behaves,” said OPEC Secretary-General Abdalla El-Badri after the meeting.
Who knows where oil prices will go from here. Given most speculators are nothing more than momentum investors, you know that many of them who've been long oil have lost a lot of money. What happens when you lose a lot of money all of the sudden? You become shell shocked and end up doing nothing for a while until momentum returns.
It's really too early whether oil will climb back, but I'm betting money in my Motif Investing portfolio that oil prices will rebound. I've got oil exposure in USO and Chevron, for example.
LOOKING ON THE BRIGHT SIDE
I never thought I'd see gasoline prices for under $2.50 again, but here we are in 2015, enjoying some of the cheapest gas prices in recent memory. Perhaps it's time to get that big gas guzzling SUV again! Lower oil prices should lower production costs for anything that requires plastic and steel as an input. Airfares should also decline as well. We should all be thankful for the decline in oil, but prepare ourselves for higher oil prices in the future.
In 2021, oil prices have rebounded significantly thanks to a global rollout of vaccines. Demand is coming back and the oil collapse is a distant memory. Electric vehicles should be in higher demand with President Biden's potential $10,000 tax credit for EV vehicles. Further, there is a lot of infrastructure spending as well.
Related: Tax Rules For Buying An SUV Or Truck
And now for some brilliant humor by Iman Crosson which highlights the main reason for why the commodity bubble popped. This is classic.
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25 thoughts on “Why Did Oil Collapse And How Low Will Gas Prices Go?”
my hummer sits while i drive my 95 toyota that gets 35mpg i dont buy anything but food and pay bills i will not buy anything or go on any vacation until gas prices fall to 2.00 a gallon and stay there for 6 months. been doing this for 2 years now, all my friends and family have joined me. don t buy anything until this stops.
I did notice the oil price went down by $0.06 (from $1.40/L to $1.34) to at the gas stations the other night. And I filled my car up ;)
That video is fantastic- he does such a good job of imitating Obama!
I’ve been taking public transit as many places as possible. I don’t drive that often but I do fly several times a year and I’m really hoping airfare will drop soon with the dip in oil. Flights have been crazy expensive this year.
Oil prices didn’t even drop a dime here, so I’m waiting!
Don’t hold your breath! Gas stations will keep prices high and sticky for as long as possible!
As a Doomer, I clearly expect gas prices to climb. Yesterday, the price dropped to about $1.31/litre, which was fabulous compared to the $1.36 it has been. I commented to my husband that it would not last. This morning, the price was back up to $1.38.
I’d love to be wrong, but I don’t believe that anything will stop the climb, even if there are temporary drops.
I think we’re going to keep seeing these cycles go up and down with oil and gas prices. Who knows how long until we hit “peak” oil, if we haven’t already, but I’m predicting this cycle will only get worse as we get near it.
Thankfully, I don’t drive much. However, I accepted a summer job that is a good 45 minutes away for one month to gain “experience.” Can’t ride my bike that far and our metro system stinks (I plotted it out and it would take me 2.5 hours by train/bus vs. 45 minutes by car. Crappy to say the least!)
The prices may dip for a while but ultimately will continue to rise. As we decimate this finite resource demand will drive the price upward. Peak oil is close.
Yeah, the silver and margin requirement was a biggie. You don’t think it was Osama Bin Laden popping the bubble from his grave though? If you look at the timing, it’s spot on!
I’m convinced oil will be above $100 by year end, and closer to $115, hence why I’ve gone long oil ETFs in the pullback last week. Just a trade.
That is a pretty good conclusion given the relationship btwn oil and the USD. Strong USD, cheaper oil!
you are idiot if you think Osama was killed by US and has anything to do with economy lmao its biggest lie show US showed He died naturally way before and American people sooo stupid they believe that their army killed Osama. come on what they showed its joke how they killed him and what they did with his body man im sick of how US government easily and openly can lie to its people and they believe anything they see or hear from tv news and their government. i feel sorry for you
I expect prices to go right back up for Memorial Day!
I would be thrilled if gas prices dropped since I drive about 2500 miles a month. However, I wouldn’t go on a spending spree or anything, I just buy what I have to and drive where I have to go.
I have a good feeling you are exactly right! Oil right back to the highest point just when we need to consume it the most! Crap.
No idea where oil prices are going. But they’re not finding any more supergiant fields, at least for now.
Commodity bulls will maintain that long-term gold/oil ratio is reputed to be 15x — but with longish periods in between where it’s way out of whack.
I think gas prices will stay firm through the summer. Oil prices will also tick back up to around $105 by year end. I think that other metals and commodities will drop though!
The spread in gas prices on Mother’s Day was interesting… downtown Portland had stations selling for $4.20/gal and closer to home (out on the edge of urban growth boundary) was only $3.82/gal.
Im just waiting to see the decline. I know the gas stations need to deplete their higher cost inventory first, and then we have the pick up in gas price for the memorial weekend…but we should start to see relatively lower prices in June!
It will go up again. Nothing to do with demand or supply – much to do with speculation.
I think it was supply/demand! Driving decreased due price increases to the point supply finally affected price. Speculation adds to the problem as well. I think it will go down before it goes up. If the price drops by fifty cents, I will save only roughly $32 per month, but more importantly other items that are affected by transportation cost will not increase or possibly decrease. This may have a psychological positive effect, but I think the unemployment percentage is more important! Every week the stock market moves up or down based on the jobs report.
You’d THINK it would be logically supply and demand, but speculators, including a retail trader like myself can’t get enough of this crazy volatility and momentum.
Private sector hiring again is pretty good! Too bad the headline unemployment rate is at 9%.
Really? I think if oil price really collapse, we should put in a gas tax to keep price artificially high. That way, people will be used to the high price and complain less. It’ll also help push alternative renewable energy along.
That’s actually a very smart suggestion! Hope Obama or his staff is listening!
My favorite thing about these spikes is watching how many analysts play Monday morning quarterback…where were they the day before or the week before the dip? Could have made their bosses a lot of money.
Whatever happened to that guy who declared Oil would hit $200 by years end 2009?
Agree. Basically, anybody can say anything and get away with it! As soon as things collapse, people all say sell and vice versa. It’s the nature of the beast!
We need to all understand what our own hurdles and comfort levels are and stick to our guns.
Going up again- what a ride. Easy come, easy go- long & short.