Last night, crude oil plummeted by more than 4%, hitting a new low since 2022. Brent crude oil is already below $70, and the price of US oil is even lower than this. There has always been a logic that crude oil will plummet every few years.
Why the crash?
My simple and crude view is that crude oil is not scarce. OPEC calls for joint production cuts every day, but in fact it cannot escape the law of economic cycles. When the economy is on the rise, production cuts are somewhat helpful and prices can rise. However, when prices rise to a certain level, time drags on, and the economic cycle goes down, production cuts are useless, demand is weak, supply exceeds demand, and prices begin to fall sharply, or even plummet.
The Federal Reserve is the central bank of the world's central banks. The interest rate hikes and cuts behind it actually reflect the overall rhythm of the global economy.
When the economy is overheating, raise interest rates. When the economy is too cold, lower interest rates.
Therefore, I matched the crude oil price trend with the interest rate corresponding to the Fedâs rate cut cycle, as shown in the figure below.
Do you have your own answer after looking at the picture?
Can you find that when crude oil prices fall, it basically corresponds to when the Federal Reserve interest rate starts to decline?
You can see the location of the circle in my picture by looking at it yourself.
In fact, the Fed will not cut interest rates for no reason. It will only cut interest rates when there are problems in the economy. The normal rule is that when the economic cycle turns and begins to peak and fall, interest rates will be cut to smooth economic fluctuations. This also matches the following figure, economic downturn - insufficient demand - crude oil oversupply - price decline.
You can also see in the figure below that when the Fed started its interest rate cut cycle, crude oil began to fall sharply. So, at this point, you have to be on guard. How low will crude oil fall?
