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The Zoe Blog

Is Oil below $40 unusual?

Posted by Andres Garcia on Jun 23, 2017 4:39:07 PM
  • Is recent oil volatility unusual?
  • Are current oil levels below historical standards?

When I was a kid, I used to love roller coasters. I might be exaggerating, but I think my brothers and I rode Kumba in Bush Gardens, Florida 12 times straight. Below is the picture of this beast.


Fast forward, and a few weeks back I went to Hershey Park in Pennsylvania with own my family. My kids had a great time. I would highly recommend it if you have kids under 10. When we were there I saw the below roller coaster.

Roller costers.png

It's one loop. One loop for crying out loud and I got nauseous just looking at it. So, what happened to me? Well, I just don't like that type of entertainment anymore (I have enough of that with two young kids and starting a business).

Similarly, the world is freaking out because Oil fell -20% from recent peaks, even though, when you look at rolling six-month periods over the last 30 years, we experienced a 20% oil drop 14% of the time. Meaning, it's not THAT uncommon.

So why does it FEEL so much worst? Well, over the last year, oil has been trading within a tight $12 range. We have a short memory and basically forgot what volatility feels like. So, when we get on the kiddy roller coaster we now feel nausea.

Is $40 oil that unusual?

I also hear conversations of "the horror" it would be if Oil were to break below $40. Hold the phone, is oil below $40 that abnormal? If we take into consideration historical oil prices from the 1970s onwards (before OPEC existed) and we adjust for inflation, Oil has been below $40, 40% of the time. Now I am not saying that oil will fall below $40 next week, I don't have a crystal ball, but it would not be that infrequent.


Source: Macrotrends, Zoe Financial

That leaves a lingering question. What IS a very low price historically speaking? When inflation is adjusted, oil has only traded below $21, 5% of the time over the last 47 years. You might say, "We live in a different world than the '70, '80s, '90s so it's not an apples to apples comparison." Ok, fine, if we look at the last three year rolling average oil prices, a two standard deviation move (meaning that there is only a 5% chance of occurring) would bring the price down to..drum roll please..$21. Oil at $21, now THAT would be a story. 

In a few days, I will write a piece on oil's fundamental drivers and a bit on the history of the different regimes, but figured I would get this note out first as I am getting so many inquiries about the -20% drop. 

 Stay tuned...

Disclosure: Nothing on this blog should ever be considered to be advice, research or an invitation to buy or sell any securities.

Topics: Investment Insights

*All investing is subject to risk, including the possible loss of the money you invest.

**The projections or other information generated by Zoe Financial, Inc. regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.


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