OPINION:
When will oil prices come down? Do not ask a television pundit. Ask the people risking billions of dollars on the answer.
Many of my clients — small and midsize businesses — are eager for elevated energy prices to return to Earth. High oil costs do not affect just the price of gas at the pump; they also have far-reaching impacts on many other business expenses.
For example, when oil prices are high, so is the cost of heating an office or production facility. Shipping costs have skyrocketed because freight companies seem to have no problem passing on their higher diesel costs to customers. Neither do airlines, which is why airfares leaped in June and July.
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Raw materials — solvents, lubricants, bearing grease, rubber, wax, plastics, ink and dyes — are all petroleum-based. Fertilizer costs for farmers go up because of the energy used to manufacture this product.
Refrigeration materials, fan belts, paint, brushes, rollers, construction materials and pretty much all office supplies, including paper and pens, include petroleum-based materials.
So it is not just gas, and it can have a significant impact on a company’s overhead. If you run a business, it is important to factor these cost increases into your budget. Yet it is also critical to look ahead and realistically predict when these prices will ultimately fall so you can better conserve cash now and act in the future.
How can you predict when the price of oil will fall? There is no single right answer, but I know one thing: Do not listen to the experts. The news channels need to fill the airwaves, and the news sites need clicks, which means that anyone with an opinion can weigh in. The messages are conflicting and unreliable. You have a business to run. You need better information.
The people who really know are those risking their money in the markets. Follow the money, and you will be able to tell. When it comes to money, these people know more than any TV pundit, and they are certainly not stupid enough to share their expertise publicly with anyone else. So what have I learned from some of these experts?
First is the price of oil. Just search “price of Brent crude,” which is a more reliable indicator, as it is a major global trading benchmark for light, sweet crude oil. Here you will get a real-time chart of oil futures — what the markets are betting oil will cost.
As of this writing, the cost is about $100 per barrel, though that could change at any time. However, bear in mind that it peaked at nearly $140 in March 2022 and averaged roughly $112 in 2012. Also interesting is that the Brent futures curve trends down, not up. The best target price of oil, I am told by friends in the petroleum sector, is about $80 per barrel. Watch the trend.
Next, look at freight costs. For this, I like to check the TD3C Baltic Futures rate, which tracks Very Large Crude Carrier transportation on the Middle East Gulf-to-China route. Those rates have skyrocketed to extraordinary levels and remain elevated. It makes sense; if you want me to send a shipment through that part of the world, you had better expect to pay.
When these rates begin to significantly drop over a longer period of time, you will get a good indication that hostilities are ending.
Finally, keep track of insurance. Who would be willing to insure shipments through the Strait of Hormuz? One site I follow publishes a real-time measure of war-risk insurance rates, based on estimates compiled from Lloyd’s List, Breakwave Advisors, carrier advisories and other sources.
This rate is running at 40 times — yes, you read that right — the peacetime rate. Keep an eye on this tracker. Its downward movement is another indication of longer-term energy price stability.
While the war with Iran continues, my savviest clients are taking steps to mitigate the impact of higher energy costs. They are using utility consultants to find savings on their bills, sharing more freight costs with their customers and allowing more employees to work from home to reduce commuting costs.
They are cutting back on unnecessary travel and, where possible, not committing to bulk material purchases. They are also holding off on construction projects.
No one expects these higher prices to continue indefinitely. When tanker rates, war-risk premiums and oil prices fall together for a sustained period, it is a strong market signal that traders, ship owners and insurers perceive the risk to energy supplies to be declining. From there, they can adjust their spending.
My best clients are always looking ahead, and these are the metrics they use to forecast energy costs. I am sure other experts can offer alternatives, but these have worked for many — and they should work for you.
• Gene Marks, CPA, runs The Marks Group PC, a financial and technology consulting firm near Philadelphia.
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