Bargain Brent

New oil dynamics may challenge crude growth logic

Fears for the wobbly world economy have pushed Brent crude below $100 a barrel for the first time since July. Long-term trends at work in the oil market mean it could stay depressed. That's good, since cheaper energy helps industry. Better still, booming shale output, greater efficiency and the rise of natural gas as a rival transport fuel may keep the oil price subdued even as growth is stimulated.

The price of Brent has dived almost 20 per cent in two months amid fears of a global economic slowdown. The latest dip was part of a broad sell-off in commodities that hit everything from gold to grains and industrial metals. Recent history suggests oil prices climb higher as soon as economic activity picks back up, a reaction that limits the duration of any stimulus provided by lowered energy input costs. There are three reasons to think this time may be different.

First, supply. The flow of crude from America's prolific shale deposits in Texas and North Dakota has been outstripping estimates. Eventually, America's revolution may spread elsewhere, including to Russia and China. This year, Citi expects oil supply growth to outpace demand growth by more than a third.

Second, the demand outlook is changing. Years of high crude prices have sparked a renewed push for fuel efficiency. Analysts at Citigroup estimate that new vehicles worldwide are burning an average 2.5 per cent less fuel per year. China's appetite for crude is also moderating as its growth engine pivots away from oil-intensive heavy industry and construction towards consumption and services.

Third, ultra-cheap natural gas is eating into oil's monopoly as a transport fuel. Instead of paying $98 for a barrel of oil, truckers, shipping companies and rail operators can get the same amount of energy from American natural gas for around $25. In an aggressive scenario, Citi estimates gas could displace 13.6 million barrels of oil per day by 2025 - about 18 per cent of today's oil demand.

The changing dynamics mean there is a decent chance that crude may continue to trade at or below $100 even if global growth picks up. A budding recovery free of the drag of high fuel prices would be a welcome development - and not just for the world's beleaguered drivers.