The magnitude and speed of the collapse in oil has roiled markets; only the
selloffs in 1997-98 (61%), 1986 (67%) and 2008 (73%) were larger than the
recent one (60%).
In order to assess the sustainability of lower oil prices and their effects on the global economy and markets, Barclays has constructed a model to explain real WTI oil prices based on the global demand-supply balance for oil, global IP, OPEC market share and real US power prices. The model explains 89% of oil price moves since 1991, including the boom, and, importantly, the collapse since June.
The medium-term drivers in our model suggest that lower oil prices are likely to persist. Demand growth is slowing, driven by energy efficiency and lower aggregate growth globally. Moreover, oil should remain a well supplied market, with US tight oil keeping OPEC in check.