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As 2016 winds down and we look back at what transpired over the course of the year, one of the biggest standouts has to be the turnaround in crude oil prices. After starting 2016 just like it finished 2015, crude oil prices were down close to 30% on the year as of early February. However, like the equity market in 2016, crude oil prices staged a major rally and turned big YTD losses into big YTD gains. At current levels, crude is on pace for an annual gain of over 40% and nearly a double from its intra-year low.
Looking back over the last 30+ years of annual returns for crude oil, there have only been two other years where the commodity has been both up 25%+ YTD and down 25%+ YTD in the same year. Those two years were 1990 and 2008. As shown in the chart below, however, both years saw entirely different paths. Like 2016, in 1990 crude oil prices were weak to start the year and then rallied strongly. Obviously, the circumstances were a lot different between now and then as the late year spike in 1990 was driven by Iraq’s invasion of Kuwait. In 2008, the swings occurred in the opposite order where the 25%+ YTD gain occurred ahead of the 25%+ YTD decline.
So what happened after these wildly volatile years for crude oil in the past? Did the commodity start to settle down, or did the volatility continue? The chart below shows the performance of crude oil prices in the year after both of the prior years cited below (1991 and 2009). As shown, the year that followed these two prior years was almost as volatile but in two completely directions. In 1991, oil prices continued the declines they saw in the fourth quarter of 1990 and traded sharply lower in the first quarter of 1991 before settling down for the remainder of the year but still finishing down over 30%. More recently, in 2009 crude oil also started off the year relatively weak before turning around and finishing the year sharply higher with a gain of over 75%. Whichever way it goes next year, one thing you can probably count on with crude oil is that like 2016, the magnitude of the move is likely to be large.