The oil price is falling: who predicted that?
It's tough to make predictions, the saying goes, especially about the future. And it's particularly tough if you're predicting the future of the oil price.
Earlier this year, with a barrel of Brent crude nudging $128, analysts and traders were predicting it could soon hit $200 a barrel. Most people agreed the oil price could only go one way. And that's upwards.
With hindsight, what happened next was predictable. Oil prices went into reverse at a near-record speed, dropping more than 20% this quarter. Next time you pop down the shops to buy a barrel of Brent crude, you can expect to pay less than $93.
Suddenly, everybody agrees the price can only go one way from here. And that's down. Some traders and analysts even predict it could drop to $50 or $40 a barrel.
The mechanics of oil
The oil price plunge has been partly sparked by our constant, troublesome companion, the eurozone crisis. Not to forget its slovenly siblings, weak US jobs data and slowing Chinese manufacturing.
When global growth slows, demand for oil slips and the price falls. It has done this for years, in what has always been seen as a self-correcting mechanism.
A falling oil price reduces industry costs and makes consumers feel richer, which helps to restart global growth. Recession over. Job done.
In recent years, many people feared this mechanism had broken down, because thirsty emerging markets kept oil demand high despite the Western slowdown.
It doesn't look so broken now.
Fracking heaven
Another reason for the oil price reversal is buried deep below the US in fine-grained sedimentary rocks. The world's greatest gas guzzler is sitting on vast reserves of shale gas and oil that are now easier to access more economical to produce, and could make it energy self-sufficient in just a few years.
The US isn't the only country sitting on a shale goldmine, so are Russia, Brazil, China, France, Germany and -- somewhere below Blackpool -- the UK. If shale fulfils its promise, the peak oil crew look doomed. Along with the $200 a barrel merchants.
The West, however, will be saved.
All hail Shale!
Arabian knights
Easing tensions between the US, Israel and Iran have also forced the oil price down. So has Saudi Arabia, the world's swing producer, which has been pumping overtime to force the oil price to around $100 a barrel, in a gift to the global economy.
At that price, Saudi Arabia can still fund the social programmes it needs to head off a home-grown revolt, while its big regional rival Iran probably can't.
Russia, the world's largest gas and oil producer, also needs around $115 a barrel to break even. A falling oil price is bad news for investors in this single-issue economy.
Oil falls, markets rise
Falling oil prices are a filip for stock markets, because they reduce company input costs, and the cost of transporting goods to market, and therefore bolster profits.
So that's good news for supermarkets such as Sainsbury's (LSE: SBRY) and Tesco (LSE: TSCO), and consumer goods companies such as Reckitt Benckiser (LSE: RB) and Unilever (LSE: ULVR).
It is, of course, bad news for the oil majors. BP's (LSE: BP) share price has dropped from £5 to just over £4 since March. Royal Dutch Shell (LSE: RDSB) and ExxonMobile (NYSE: XOM.US) have also hit the skids, although less dramatically.
Investors haven't lost interest in oil companies. I was looking at stockbroker TD Waterhouse's top 10 client buys for last week, and Gulf Keystone Petroleum (LSE: GKP) (2nd), BP (7th) and Max Petroleum (LSE: MXP) (9th) were all in demand.
Tullow Oil (LSE: TLW) looks tempting to higher-risk investors, having enjoyed plenty of drilling success in West and East Africa, with further promising projects in French Guyana, Kenya and Mauritania.
Oiling the wheels
Many investors will find recent share price drops too tempting to resist.
If you're bold enough to go looking for the next oil takeover, you could strike a rich seam of M&A activity. One Fool couldn't believe his eyes when he discovered his largest oil holding is on a P/E of 5. You will also be delighted to discover there is a Foolish way to invest in oil & gas explorers.
As for future oil price movements, I'm making no predictions.
Oils, Pharmaceuticals, Banks, Telecoms -- just where should you invest today? "Top Sectors Of 2012" is the Motley Fool's latest guide to help Britain invest. Better. The report is free.
Further investment opportunities:
> Harvey owns shares in BP and Royal Dutch Shell. He does not own shares in any of the other companies mentioned. The Motley Fool owns shares in Tesco.
