|Looking ahead: The link between oil and land prices||Looking ahead: The link between oil and land prices||Charles E. Gilliland||Gilliland||2018-12-03T06:00:00Z||Land|
Source: Haver Analytics
Statistical evidence shows that oil prices have a significant effect on Texas land prices. Specifically, although the impact is not immediate, higher (lower) oil prices tend to boost (dampen) Texas rural land prices in the long run. This impact suggests that changes in the direction of oil prices may signal a long-run shift in land market trends.
The chart shows current spot prices (blue line) for West Texas intermediate crude oil along with contract prices for delivery of that oil in both one (red line) and two (green line) years. When prices for future delivery range above (below) current spot prices, market participants expect prices in the future to range higher (lower) than current prices.
From 2015 through the beginning of 2017, markets anticipated rising oil prices. However, markets began to anticipate falling oil prices beginning in second quarter 2017. The difference between current and futures prices has begun to expand, signaling that traders anticipate declining oil prices.
Do these expectations portend a reversal in Texas land price trends? The answer is maybe, but . . .
First, other forces also affect land markets. Income expansion, interest rate dynamics, and history also play substantial roles in land market trends. Second, responses to oil price changes have had varying impact on land prices in the past. Finally, futures prices rely on guesses by market participants about future realities.
Actual results likely will differ from those projections. Anticipated oil price erosion may not become reality. In the final analysis, the significance of this chart lies in the revelation that market perceptions about oil prices have shifted. The factors that contributed to that shift may influence thinking among land market participants.