Welcome to ‘Normal’ Crude Oil Price, Trading at 100-Year Average

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Bloomberg / January 16, 2015

The theory goes that commodity prices move in “supercycles” or bursts of phenomenal surges, followed by longer, less-exciting periods. As such, a barrel of oil at $50 is, well, normal.

Many people think the oil price has crashed, but it has just gone back to its long-term historical trend, according to Ruchir Sharma at Morgan Stanley Investment Management Inc. That makes a barrel of oil at around $50 just about right based on a 100-year inflation-adjusted average, said Sharma, who manages $25 billion as head of emerging markets.

“The price of oil is returning to normal in its long-term 100-year history,” Sharma said in an interview from New York. “We tend to have a short memory and we tend to forget that the price of oil breached the $50 a barrel level only a decade ago.”

Brent crude oil futures, which trade in London and are used as a benchmark to set prices for more than half of the world’s oil, reached a record of $139.83 a barrel on June 30, 2008, according to data compiled by Bloomberg. By Jan. 13, the price had plunged 67 percent to $46.59.

“At times like these, it’s good to step back and look at the bigger picture, look at what it has done through a long history,” he said.

The supercycle surge in oil prices was kicked off by China's emergence as an industrialized economy and net oil importer in the middle of the 1990s.

In 1995 it imported 343,000 barrels a day, according to BP Plc data. In 2013, it bought 5.7 million barrels a day. The nation is now the world’s biggest energy consumer and the second-biggest oil user.

“China’s oil imports took off around 2003 and it emerged as a big factor in the market,” Thina Saltvedt, an Oslo-based oil analyst at Nordea Bank AB, said in a Jan. 13 phone interview.

There’s a long time lag in oil between investments and new supply and it can take 10 years, sometimes 15 years, to balance the market and match it with demand, said Saltvedt. China is structurally changing its economy from big, energy-intensive industry to less so. India or perhaps Africa will start to take over the role China has played, said Saltvedt.

“We’re now close to the end of this big oil cycle and entering the next 10-15 years cycle of a more balanced and stable market,” she said.

Sharma went further back with his commodity price tracking -- 200 years -- and said the trend is for prices to rise for a decade then fall for two decades.

The reason: something new comes along that attempts to substitute a commodity or find a new way to meet demand.

“Commodity prices over time don’t go up. Even in the case of oil, where prices have gone up somewhat over time, there’s a lid on price because there’s always something that caps prices,” he said.

Surging prices in the 1970s led to the development of the North Sea and Alaska oil fields. Then they crashed in the mid-1980s when Saudi Arabia flooded the market. It took five years for prices to regain lost ground.

“These are all cycles -- high prices sow the seeds for lower prices and lower prices sow the seeds for high prices,” Sharma said. “That’s the cycle that commodities follow.”