This discussion Topic, requires that you apply supply and demand analysis to a c

Question

This discussion Topic, requires that you apply supply and demand analysis to a current topic in the news or some situation that you know about. To get the full three points for this one, your analysis must be very technical. That means it must include, or allude to terms such as:

Determinants of Demand

Determinants of Supply

Quantity Demanded

Quantity Supplied

Shifts in the Demand Curve

Shifts in the Supply Curve

Equilibrium Quantity

Equilibrium Price

OLD EXAMPLE:

Red wine has become an increasingly popular drink over the last decade. Not only has the quality of California wine dramatically improved, but people are realizing the health benefits of red wine. Because of this change in consumer tastes and preferences, the demand for red wine has increase, causing the demand curve to shift to the right. A rightward shifting demand curve will increase the price of red wine, and I have seen the prices of my favorite brands go way up over the last four or five years. However, California is currently experiencing a severe drought. This is shrinking the output of the wineries and causing the supply curve to shift to the left. Again, when the supply curve of a good or service shifts to the left, it will cause the price to rise. Therefore, I expect to see another price increase in the near future. As a result, I’m going to start stocking up now while the price is low. The bad news is that there are probably a lot of other people thinking the same thing. When people think the price of something will go up, they’ll run out and buy it now while it’s cheap. As we all rush to the wine stores to stock up on wine, this itself will cause the demand curve to shift to the right. This would be a third factor causing the price of red wine to go up. Maybe I’ll go ahead and switch to beer. When the demand for an item goes up, the demand for its substitute will also rise. So, if everybody else thinks that way, the demand curve for beer will shift to the right, causing the price of beer to rise. I guess I’ll have to stop consuming alcohol entirely, or get a part time job so I can afford it.

Explanation / Answer

I would like to discuss crude oil as black gold has been in news for several reasons through 2018 and this makes analysis on the commodity interesting.

From a demand perspective, crude oil demand is a function of economic growth. With the IMF projecting world GDP growth to remain stable at 3.9% for 2018 and 2019, I expect the demand for crude oil to remain firm. Further, EIA expects global oil demand to increase in 2019 primarily on account of higher consumption in emerging markets. Therefore, if global GDP growth surprises on the upside in 2019 and emerging markets GDP growth remains robust, I expect the demand curve for crude oil to shift to the right. The factor that can offset this view is the current trade wars and its impact on global GDP growth. If trade war does hit growth, the demand curve will shift to the left. However, there is a higher probability of demand remaining relatively stable.

From a supply perspective, the key determinants include OPEC and non-OPEC production agenda, the cost of exploration & development (new oil discoveries) and the cost of producing an incremental barrel of oil.

On the supply side, OPEC countris have been overdelivering on the production cut agreement while non-OPEC members have increased prodduction. With one factor offseting the other, I expect supply to remain stable and the supply curve to remain stable as well. However, the interesting factor here is sanctions on Iran and its likely impact on supply in 2019. If the sanctions are successful, the oil supply can potentially decline and the supply curve will shift towards the left. This can be offset by increase in oil production by other OPEC and non-OPEC members. Overall, I aassign high probability of supply remaining relatively stable.

For crude oil, quantity and price are free market determined coupled with intervention by oil producers on any sharp increase or decline in price. In general, the price is likely to remain above $50 per barrel as a decline below $50 per barrel would make incremental production less profitable. If oil does decline to $40 or $50 per barrel, the markets automatically reduce production and prices move higher.

Overall, I expect oil to ssustain above $60 per barrel and the key triggers to watch for will be impact of trade wars on GDP growth and impact of sanctions on Iran on supply.

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