Overall Outlook on Crude Oil Prices and Major Asset Classes

Next, let’s discuss the overall outlook for oil, coal, fertilizers, agriculture, and other metals.

Key Assessment of Crude Oil Prices

First and foremost, while we remain bullish on oil, coal, fertilizers, agriculture, and other metals in the long term, this does not mean I believe oil can remain stable above $300 for an extended period. At this stage, the best approach is to wait until the Strait of Hormuz reopens and crude oil prices pull back before adding to your oil positions. At current levels, adding to your oil positions carries relatively high risk, so it’s advisable to wait a little longer.

Recently, many analysts have suggested that WTI could remain stable above $200—or even $300—for an extended period. I am skeptical of this view. If WTI were to reach $200 or $300, Brent crude would certainly be even higher. Oman and Dubai crude would likely trade at prices even higher than Brent.

  • WTI: Reflects crude oil prices in the Americas
  • Brent: Reflects seaborne crude oil prices / crude oil prices in Europe
  • Oman, Dubai: Reflects crude oil prices in Asia

So far, Oman and Dubai have been the highest, followed by Brent, with WTI being the lowest. If WTI were to stabilize long-term at $200 or $300, then the prices of Brent and Oman/Dubai crude might skyrocket. If Brent and Oman/Dubai crude prices skyrocket, Europe and Asia will be unable to sustain economic growth.

Furthermore, rising oil and natural gas prices will also impact fertilizer costs. In extreme cases, increased fertilizer costs could lead to food supply shortages in smaller nations. Oil and natural gas serve as the foundational raw materials for many chemical products. If WTI remains stable at $200 or $300 for an extended period, the economies of Japan, South Korea, Southeast Asia, and Europe would have already collapsed.

Once the economies of Japan, South Korea, and Europe collapse, Japanese and European government bonds will face problems. Due to foreign exchange swaps and basis arbitrage, U.S. Treasury bonds won’t escape unscathed either. If you don’t understand why foreign exchange swaps and basis arbitrage lead to the interdependence of government bonds in the U.S., Europe, Japan, and South Korea, you can watch these two videos from December 15th, which systematically explain what foreign exchange swaps and basis arbitrage mean.

Contradictions in Market Logic

If you believe that WTI can remain stable above $200 or $300 for the long term, then you cannot simultaneously believe that the Shanghai Composite Index can rise to 5,000 or 6,000 points, nor can you believe that U.S. stocks will hit new highs, nor can you believe that gold will continue to rise. These are inherently contradictory.

It is possible for WTI to briefly break through $200 or $300, but this depends on the duration of the war. There is only one scenario in which I believe it is reasonable for oil to stabilize above $200. What is that scenario? It is when the Federal Reserve significantly cuts interest rates and expands its balance sheet, while the U.S. dollar depreciates sharply. Under such conditions, it is possible for WTI to stabilize above $200.

Therefore, it is essential to distinguish between the short term and the long term. Let’s look at this chart: from 1986 to the present, the price of WTI crude oil has never stabilized above $150 for an extended period. Although it briefly spiked in 2008, it has never remained stable above $150 for an extended period.

Historical Review: The Causes of High Oil Prices in 2008

Alternatively, we can look at this chart. This chart is organized by month, so it does not show the most recent prices. However, it covers a relatively long time span. From this chart, we can see that in the period leading up to 2008, oil prices were rising at a frenzied pace.

The main reason crude oil prices rose so high at that time, in my view, was the rapid urbanization of China’s 1.4 billion people. China’s development was moving too fast back then, and the demand for crude oil was simply too great, so such a high price was reasonable. Furthermore, China’s economy was highly dependent on fossil fuels back then—unlike today, where the economy is beginning to incorporate new energy sources; at that time, it relied heavily on fossil fuels.

In contrast, the current global economy is clearly not growing as strongly as it did between 2000 and 2008. Additionally, we now have a variety of new energy sources. Therefore, if we want WTI to remain stable at $200 or above in the long term, I see only three possibilities.

Three Scenarios for High Oil Prices in the Future

  1. Significant Depreciation of the US Dollar: With a significant depreciation of the US dollar, oil prices might stabilize at high levels for an extended period. This is the first possibility.
  2. Rapid Urbanization in India: If India rises rapidly, it could lead to a sustained increase in oil demand. Previously, the US was the largest importer of crude oil, but now it has its own shale oil technology. China is now the largest importer of crude oil, but China has developed new energy sources. So both the US and China have found their own solutions. Therefore, if we want to see new demand for crude oil, we’ll have to wait for India’s rise—this is the second factor.
  3. World War III: The world descends into total chaos, leading to World War III. Well, I believe this possibility is also very low at present.

Causes of the 2014 Crude Oil Price Crash

Let’s look at this chart again. Around 2014, there were many factors behind the sharp drop in crude oil prices. The most important reason was that the U.S. had developed shale oil technology at that time. However, it took some time for this technology to become widespread, and the U.S. didn’t truly transition into a net oil exporter until after the COVID-19 pandemic.

After the U.S. developed this shale oil technology, the Middle East, in an effort to capture market share, decided to wage a price war against U.S. shale oil. Consequently, the Middle East also increased production during that period. Additionally, China’s growth rate had slowed down. With supply rising and demand falling, oil prices plummeted throughout this period.

Crude oil prices are currently rising very rapidly, primarily because supply is shrinking too quickly. After the Strait of Hormuz reopens, we’ll likely see a pullback first, followed by a continued rise. If the Strait of Hormuz reopens by the end of April, crude oil prices could potentially drop back to this range—that is, if it reopens before the end of April, prices might fall to this level before starting to rise again.

I don’t think the absolute peak will remain stable at $200 or $300 for long; in the long run, prices will still revert to fundamentals.