What The Business Cycles Tell Us About Oil Prices

• Growth cycles in the global economy are incredibly important for commodities markets in general, and oil an gas prices in specific.
• According to the Kitchin cycle, the current slowdown in energy is likely to be a mid-cycle soft patch.
• Barring a full global economic slowdown, gas and especially oil prices are likely to get stronger in the latter half of 2023.

The oil and gas markets are currently in the throes of yet another downturn, with Brent crude down 34% from its May 2022 peak while U.S. Henry Hub natural gas has crashed 73% from the August 2022 peak. Energy stocks and crude oil futures have also come under pressure after the latest weekly U.S. data showed commercial crude inventories spiked by a whopping 16.3M barrels. 

According to the U.S. Energy Information Administration (EIA), crude stockpiles rose to 471.4M barrels, ~8% above the five-year average and way above the Wall Street consensus of just 800K barrels. 

Meanwhile, refinery activity slowed down unexpectedly, with the weekly capacity utilization rate falling by 1.4 percentage points to 86.5%, compared to the consensus of a 0.2 percentage point increase.

Whereas the current oil and gas price trends do not look very encouraging, zooming out and looking at the bigger picture reveals that the current slump is part of a boom and bust cycle that repeats itself with alarming regularity. Indeed, Reuters market analyst John Kemp has argued that the ongoing selloff is part of the Kitchin cycle that lasts for 3 to 4 four years. 

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