A report released by Alliance Bernstein on Friday says oil prices should continue to rise and the “black gold” should remain expensive when compared to some precious metals and other benchmarks in the medium term, though its price can be considered relatively “low” in the short term.
In a report titled “Is the Price of Oil Cheap or Dear? An Apples-to-Apples and Barrels-to-Burgers Comparison,” Bob Brackett, Michael Parker, Hugh Wynne and several other analysts look at the price of oil in relationship to the value of the U.S. dollar, gold and other measures. They conclude that oil has been relatively expensive since 2005 and should continue to be so until at least 2013. Still, it remains below peak levels of 2007-2008.
“Today's crude prices are about $10-$15 per barrel above our calculation of marginal cost, driven by current levels of spare capacity and inventory,” they wrote in the report. “We therefore currently carry a crude oil deck with values for West Texas Intermediate growing from $100/bbl in 2011 to $110/bbl in 2013.”
The analysts say it’s important to put oil prices in a comparative context in order to grasp the broad trends affecting its price, volatility and the movement of other commodities as well as currencies.
“As the week unfolded and hopes for QE3 rose and were then subsequently snuffed (at least for the time being), observers watched oil prices rise $5/bbl to above $99 a barrel only to settle down below $96 a barrel, once again confirming the (inverse) correlation between oil and dollars and leading some to wonder the appropriate yardstick for understanding absolute oil price levels,” Brackett and his fellow authors explained.
The analysts conclude that for those who hold British pounds, current levels of Brent are higher than when oil prices peaked in the summer of 2008. However, for those holding stronger currencies (such as the Swiss Franc), oil prices are closer to 2007 levels.
To look at the changing price of oil vs. the movement of global currencies, the Alliance Bernstein commodities team examined oil prices relative to gold prices and calculated how many barrels of oil a person could purchase with an ounce of gold over time. The analysts found that – in times of extreme excess – the value approaches 30 barrels per ounce, while in times of extreme scarcity, it approaches 10 barrels per ounce.
Today, the ratio is roughly 15 to 1 – i.e., about $1,500-an-ounce gold vs. $100 barrel oil. “If today were a time of extreme scarcity, the appropriate value would approach $150/bbl,” the analysts said.
When comparing WTI to the entire basket of the S&P GSCI Industrial Metals Index, the pattern is a mirror of that for gold, they found. “In both cases, oil became dear in the year 2000 relative to gold or metals,” the report said.
The Alliance Bernstein commodities team also used the Economist magazine’s Big Mac Index as a model for compare the price of a barrel of oil (1,454,459 kcal energy content) with the price of a Big Mac (576 kcal energy) over time.
“Interestingly, a barrel of oil has on average purchased 21 Big Macs for the last five years and exactly purchased 21 Big Macs in three of those years. If we use McDonald's estimate of 4.5% food price inflation for the year, we would forecast that 2011 ratio would be 26 Big Macs per barrel, pushing above the five-year trend but still below the 28 Big Mac per barrel peak of 2008,” the analysts concluded.
With the above analysis in mind, the Alliance Bernstein team says that – by applying a variety of innovative tools and measurements – oil prices are relatively high today. Oil “looks quite expensive depending upon the currency in which one pays, [and] relative to a variety of different commodities, its dearness is consistent with the levels that it reached nearly a decade ago.” Still, the group says, oil is arguably “cheaper than its peak levels,” which were a response to a strong healthy global economy.
“The current price level appears high relative to past decades, but as each successive year passes, we may slowly come to realize that, although we long for a return to the days of cheap oil, in the future we may have found that we were actually living in them,” the report concluded.