Navigator: The Oil Price – What drives it?
It is the flow of oil in and out of crude reserves that drives the oil price and NOT the level or adequacy of inventories. The Middle East War creates a 12.5mn to 20mn bpd hole in global supply. That means every week oil drains out of reserves to the tune of one full day of world consumption. Global inventories are currently about 88 days (including Strategic Reserves and Market Inventories).
There is a close and steady relationship between the amount of oil flowing out of reserves and the price of Brent. This says that if Middle East Oil is disrupted for 30 days the price of Brent will rise to US$ 137/bbl. to US$ 140/bbl. If disruption continues for 60 days the price could hit US$ 175/bbl.
The implications: 1. Global stagflation. 2. Disparate monetary and fiscal responses. 3. The accelerated decline of President Trump’s grip on power and all that means for policy because “dying fish flap hardest”.
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