Oil Shock Potential Reduced

You could say that mid-2005 to mid-2006 was one big oil shock. However, comparisons to the 1970s highlight that the famous oil shocks of that time were supply-side


Much was made of the northern hemisphere’s warm start to winter. While warm weather quickly turned to cold, the significance of the warmth was that supplies that had been running close to balanced were able to top up to a more comfortable level. And now it appears the north will exit winter with less chilly conditions.

Often overlooked in the oil price collapse of January was an adjustment to the Goldman Sachs commodity index. By reducing the ratio of oil within the basket, Goldmans effectively forced index trackers to sell. This is a somewhat self-fulfilling mechanism, as a lower price would again see an index reduction which would again force sales and on we go.

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