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Shilling's $10 Oil Prediction Is Not Completely Ridiculous

A. Gary Shilling

Few expected oil prices to crash below $30 per barrel earlier this year, but that is just what they did. Now that oil is back up near $50 per barrel, the worst is over…right?

Not everyone thinks so. Over at Bloomberg View, A. Gary Shilling is making a headline-grabbing prediction: that oil will not only fall from today’s levels, but will fall to between $10 and $20 per barrel.

Many in the energy world would roll their eyes at such a prediction, and it could be way off base. But a year ago when oil prices rose to $60 per barrel at the beginning of the summer of 2015, everyone also thought the worst was over. Companies began adding rigs back to oil fields, hoping to capitalize on a rebound in prices. But crude began crashing again at the end of the summer, culminating in a deep plunge below $30 per barrel in January and February of this year. Very few people saw that coming.

Now, most analysts and oil companies, although more cautious than a year ago, again think that the worst is over. A. Gary Shilling disagrees.

He says that the run up in prices over the past few months was due to temporary supply outages in Canada and Nigeria, not based on lasting fundamentals. And the fundamentals are weak. Iran is back, and aims to double production to 6 million barrels per day by 2020. Libya could bring production back. And Saudi Arabia and Russia continue to produce at elevated levels.

Meanwhile, shale producers have become more efficient and successfully lowered breakeven costs. Indebted companies will continue to produce in an effort to pay back creditors.

On the demand side, China’s economy is slowing. The West is becoming more energy efficient, needing less oil and gas for their economies. Related: $13 Billion Oilfield Services Merger Set To Move Forward

And crucially, oil inventories are still at record levels, forcing more oil to be stored at sea.

All of that means that another price crash is coming…which could have bad economic consequences. Shilling is sticking with his bet that crude falls to between $10 and $20 per barrel. “An oil price drop to below $20 per barrel would be a shock reminiscent of the dotcom collapse in the late 1990s and the subprime mortgage debacle that produced the 2008 financial crisis -- both of which triggered recessions,” Shilling wrote.

To be sure, Shilling’s prediction is not the consensus view. But given that the consensus view was also wrong last year ahead of price crash, Shilling’s prediction should not be ruled out.

By Charles Kennedy of Oilprice.com

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Leave a comment
  • adec on June 30 2016 said:
    Completely senseless. Gary Shilling is out of touch and so is the author of this article. Anyway, they are entitled to their opinion, they know that.
  • GOPro2.0 on June 30 2016 said:
    Cheaper then a case of Coke Cola!! Senseless!
  • observer on July 01 2016 said:
    GB voted for the EU-exit - improbable/impossible
    Austria repeats the elections - impossible
    Russia invaded the Krim - impossible

    Oil down to $10-20 - impossible ?
  • Philip Branton on July 01 2016 said:
    Ha....and no mention here of the advances in nano-technologies that will ad to this mix.
  • Bob on July 01 2016 said:
    I guess in financial markets anything can happen and you can always get a major recession or depression driving down oil prices. But given that it appears last years over supply is being worked off, if world oil demand increases anywhere near 1 million bbls per day or roughly 1% over the next couple of years, it seems $100 bbl oil could be more likely than $10 bbl.

    Interestingly, ExxonMobil's big new find at 100% oil at max reserve estimate with an assumed 20 year life appears to add about 190 thousand bbls a day of production on average. Given that the find has been the biggest by far for awhile, it might just be another sign that consistently cheap oil will only be harder and harder to achieve.
  • Mark on July 05 2016 said:
    While $10 to $20 seems a bit low, the fact is that when there is so much excess and therefore such a significant lag in the system, this type of selloff is technically possible. I personally think that somewhere in the $30's would be enough to cause a knee-jerk reaction by suppliers, sufficient enough to quickly turn the price back around, but then again, look what happened last year.... and we are in virtually the same boat as we were in last year (ie. oversupply situation both in what has already been produced and as well, the current rate of production). I don't think that this is ridiculous at all.

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