We have been
studying the long-term evolution of energy prices in the USA since 2007 and
reported several important observations useful for profitable and safe
investments. The simplest fact we have discussed is the effect of energy/oil price
on stock prices. Share
price of Exxon Mobil and ConocoPhillips does depend on oil price. The link is
direct and positive – oil price increase is reflected in share price growth. We
have calculated regression coefficients in order to understand which company is
most sensitive.
In 2008, we reported
that several major categories of consumer prices (various goods and services)
have sustainable and quasi-linear in time trends relative to energy prices. Similar
behavior was reported for producer prices and
oil. One can easily imagine what a great opportunity arises for sound
investments. Moreover, our observations demonstrate that many of these
sustainable trends have clear turning points which provide investors with
invaluable information on effective buy/sell decision. In this article, we revisit
our previous results related to energy (oil) in order to demonstrate that the
fall in the energy price in 2014 was well predicted. Then we extend our investigation
of the future evolution of the consumer price index (CPI) of energy with new data
obtained since the beginning of 2013 when the fall prediction was done. Currently,
one is interested to know how deep the price will fall and when it will come
back to $100.
Our theoretical approach was first published more than six years ago in
a paper on the presence of long-term sustainable
trends in the differences between various components of the CPI in the USA.
We started with the difference between the core CPI (i.e., the headline CPI
less food and energy) and the CPI. Then the consumer price index of energy,
which gives approximately 9% of the CPI, was analyzed. In the beginning of 2008,
we successfully identified and predicted that difference between the CPI and
the energy index was approaching a turning point (actually observed in the
summer of 2008) and forecasted the energy prices to fall relative to the core
CPI through the first half of the 2010s. Based on the general approach, we also
estimated that after the turning point in 2008/2009 oil price would go down
from $100 to $50 per barrel in 2015 and $30-60
in 2016. As one may know this prediction
of the turning point timing and the level of oil price and the duration of
higher oil prices is relatively accurate.
Here we revisit the relative evolution of the core consumer price index
(CPI) and the CPI of energy. Figure 1 displays the difference between the core
CPI and the index for energy for the period between 1960 and 2014. All CPIs are
seasonally adjusted and borrowed from the BLS. Before 1980, these two indices had been growing almost in sync with
fluctuation around 10 units of price index. Between 1981 and 1999, the
difference grew from -10 to almost 80 units. Between 2001 and 2008, a period of
intensive growth in the energy index was observed. Qualitatively, one can
distinguish three periods of linear trend and three turning periods with a
higher volatility. The last turning point was in 2008 and the index of energy
is now on decline relative to the core CPI. However, the extremely high
volatility masked the new trend in the difference before 2011. Currently, the
new trend is clear and shows the expected behavior - energy price goes down.
The question is - when will it reach its bottom? And when the price will
reach the hard bottom?
Six years ago we expected that oil price might go
down to $22. Is this the case now?
Figure 1. The difference between the core CPI and the index for energy between 1960 and 2014. There are three periods of linear trend and three turning periods. The most recent turning point was in 2008 and the new trend emerged more of less clearly in 2011.
Figure 2 illustrates
the most recent period. Since 2001, we observe a slow decrease in energy price
relative to the core CPI. Their difference in Figure 2 is below the green line
representing the predicted trend for the period after 2010 - the slope is as
between 2001 and 2008 but with an opposite sign. Since summer 2014, the energy
index has been falling much faster than before and the (green line) trend was intercepted
in November 2014. Linear regression gives a slope of +6 for the difference
curve since 2011 which is still much lower that the absolute value of the slope
between 2001 and 2008 (-14). The energy price had extremely high volatility between
2005 and 2011. Then the price calmed down and demonstrated only short term and
low amplitude fluctuations. The level of volatility is again high since summer
2015. One might expect a few years of larger volatility from deep falls to sky heights.
Data between
2001 and 2014 give clear indication of the new trend direction and slope. Following
this trend, the difference of core CPI and consumer price index of energy will likely
reach its peak value in 2016-2018. We expect no further decrease in oil price
beyond 2018. The question is when the trend will change to the opposite like
that was observed in 2001 and 2010? Historic evidences are unbreakable – cycles
rule this world. There are many explanations of the current energy price behavior.
Various actors are suggested as drivers with own motives open and hidden. We do
not consider them as wise and explanatory. To say “cycle” does not mean to
explain something as well. This is just a set of observation in favor of future
evolution.
Figure 2. Same as in Figure 1, for the period after 2002. Linear trends are
shown.
We used only
absolute difference so far. It is instructive to analyze the difference in
relative terms and we have normalized the difference to the core CPI. Figure 3
illustrates the new pattern. In contrast to Figure 1, the amplitudes and
periods of long term fluctuations are similar and the overall evolution seems to
be repeatable, i.e. cyclic. Figure 4 exercises the assumption of repeatability.
We have shifted the original curve by 27 years ahead and obtained a striking
similarity in the amplitude and timing of the energy price falls and rises.
Figure 3. The difference between the core and energy CPIs normalized to the core CPI.
Figure 4. Same as in Figure 3 with red curve representing the original (black) curve shifted 27 years ahead
Finally, Figure
5 shows a detailed picture which could be helpful in the bottom price
estimation. The current difference presented by black curve is expected to
reach red line in during this phase of energy price fall. The intercept price is about $20 per barrel. Two years ago we
foresaw a cliff in energy price and it is here today. When the black line touch
the red one - the energy index returns to the long term sustainable trend
stretching into the 2020s. The era of low energy prices has come and the trend
will not change to the opposite before, say, 2025.
.
Figure 5. An energy cliff is not over.
We have three general conclusions:
-
The energy price
will be falling another two years with the bottom of $20.
-
The change in
energy price will be characterized by an elevated level of volatility in the
next two to three years.
-
The era of low
energy price will extend into the 2020s.
