Don't Bet That New Sofa On Higher Oil Prices

In Houston, the energy capital of the world, Gallery Furniture is an institution made famous by television ads featuring the store’s energetic owner, Jim McIngvale. “Mattress Mack,” as he’s known, is the master of promotion, and this year, he’s made Houston residents an enticing offer: “$85 and it’s free.” Customers who buy $7,000 worth of furniture or mattresses this year will get their money back — and get to keep the merchandise — if the price of oil ends the year at $85 a barrel or higher. Increasingly, it’s looking like a sucker bet. This week, the International Energy Agency said it believes it will be years before the world sees $100 oil again, and that crude is likely to average almost half that — $55 a barrel — for this year. “After years of sustained, record-high prices, a day of reckoning has arrived,” the IEA said in its Medium-Term Market Report released this week. That average is lower than the current level for Brent crude, which was selling for $56.42 today. The IEA predicts that oil won’t top $70 a barrel, on average, until 2020. In the past, such predictions have been wrong as of often as they’ve been right. There’s been a lot of comparisons of the current price plunge — crude has fallen more than 50 percent since last summer — to the oil bust of the 1980s. But the IEA sees a crucial difference this time around:

Unlike earlier price drops, this one is both supply- and demand-driven, with record non-OPEC supply growth in 2014 providing only one of the factors behind it, unexpectedly weak demand growth another.

Much of that supply growth, of course, is coming from the U.S., where hydraulic fracturing has led to the highest domestic oil output in 80 years. That surge in production has upended the traditional roles in the oil markets and contributed to a glut of supply.

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