- Miraflores Palace/Handout/Reuters
After rebounding by about 95% from its February lows, crude oil has plateaued.
And, notably, something similar has happened several times in the past, prompting analysts to wonder whether they could draw parallels.
In a recent note to clients, a Citi team led by Tom Fitzpatrick outlined three prior periods when oil prices plunged and then rebounded sharply:
1986-87 – when WTI crude plunged after a huge supply glut. At the time, Saudi Arabia pumped up production in order to maintain/gain market share. 1996-99 – when the Asian Financial Crisis slashed demand. 2008-09 – when the Global Financial Crisis decreased demand and led to a huge global economic slowdown.
“The most recent oil collapse has similarities to these three historical periods … however, the important question now is which recovery will this be most like, if any?” the team wrote.
The analysts argue that the 2008-2009 slowdown can be crossed off the list immediately. However, they point out that there are some similarities between the other two and today.
The 1996-99 slowdown, for example, has some macro parallels with the current environment, including – but not limited to – the five- to six-year dollar strength, the Fed’s tightening of monetary policy while the European Central Bank is easing, and a massive sell-off in local market currencies.
Meanwhile, looking strictly at the oil market dynamics, there are some overlaps with 1985-87, which was also driven by a huge supply glut.
Here’s what the Citi team said (emphasis added):
Looking at it from that lens, it would not be surprising in our view that the dynamics we see in Oil in the coming months (and potentially years) is like that seen in the late 1980s. This is one in which the low for Oil prices is likely in, but we are unlikely to get back to close to the highs from before the collapse. In addition, we are likely to see deep corrections (though higher lows than the February low) while still seeing higher highs on price recoveries.
In any case, it is important to emphasize that none of these scenarios 100% predicts what will happen with oil today.
After all, technical analysis is more of an art than a science, and it is extremely difficult for investors and economists to forecast what will happen in the future – especially when so many variables are involved.
But still, it’s interesting to point out that oil’s recent behavior is not without precedent – and to wonder what that may indicate (if anything) about its trajectory.