A New Ceiling for Oil Prices

Most analysts still view $50 as a floor for the price of oil – or even a springboard. But, though the futures market suggests expectations of a fairly quick rebound to $70 or $80, economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range.

LONDON – If one number determines the fate of the world economy, it is the price of a barrel of oil. Every global recession since 1970 has been preceded by at least a doubling of the oil price, and every time the oil price has fallen by half and stayed down for six months or so, a major acceleration of global growth has followed.

Having fallen from $100 to $50, the oil price is now hovering at exactly this critical level. So should we expect $50 to be the floor or the ceiling of the new trading range for oil?

Most analysts still see $50 as a floor – or even a springboard, because positioning in the futures market suggests expectations of a fairly quick rebound to $70 or $80. But economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range, which may stretch all the way down toward $20.

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