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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Get Ready For $80 Oil

Oil is only just beginning to regain some of the ground that it has lost over the last few years, but already some analysts are looking for much higher prices. Raymond James & Associates is out with a forecast that oil will reach $80 a barrel by the end of next year, stating that "Over the past few months, we've gained even more confidence that tightening global oil supply and demand dynamics will support a much higher level of oil prices in 2017”. "We continue to believe that 2017 WTI oil prices will average about $30/barrel higher than current futures strip prices would indicate."

Raymond James sees a few issues pushing prices significantly higher over the next 6-18 months. First the firm sees continuing opportunities for supply disruptions throughout the rest of the year. In particular, while Canada and Nigeria should return to robust production soon, Venezuela is continuing to deteriorate (to the point where there are now widespread hunger riots through the country), and the Libyan Civil War continues in full force. These factors could create significant supply disruptions offsetting any growth in the near term.

Second, while the North Sea, Russia, Iran, and Kuwait all appear poised to bring more production online in the next 12 months, Raymond James sees declining output around structural concerns for China, Mexico, Angola, and Colombia creating tailwinds for price.

Finally, Raymond James is forecasting robust challenges in activity ramp up in the U.S. due to labor and equipment shortages. These issues could be significant. Just as the housing decline decimated much of the pre-Recession supply chain in residential construction, leading many construction workers to change careers, oil may be following the same path. There have been significant layoffs across the oil sector and with the rest of the economy doing well, it’s difficult to imagine that oil workers will want to stay in places like the Bakken for long if they are unemployed. Related: To Avoid The Oil Curse, Russia Needs To Take A Leaf Out Of The Saudi’s Book

To be sure there are significant signs that oil may have bottomed, but black gold is not completely out of the woods yet either. With that said, Raymond James is not the only firm that is becoming incrementally more bullish on oil. Goldman Sachs, a long time bear, has recently become more constructive and even the EIA is looking for higher prices. Raymond James is still very optimistic on oil prices compared to the Street overall – the average analyst forecast for WTI for 2017 is $54.

With that said, analysts were largely caught flat footed by the fall in oil prices, so there is little reason to suspect that they will be particularly accurate as a group in forecasting any rebound. The reality is that oil prices at this stage are being driven by a variety of factors which are largely unknowable, including the degree of damage that has been done to U.S. production infrastructure. While the Baker Hughes Rig Count has rebounded slightly in recent weeks, that rise has been trivial compared to the magnitude of the fall in rigs. Only time will tell whether or not U.S. producers are able to rapidly adjust to new higher oil prices by producing more. If U.S. producers do have this level of flexibility, oil prices are unlikely to stay elevated for long. If U.S. producers are more hamstrung though, any rebound will likely be more long-lived.

By Michael McDonald of Oilprice.com

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  • Andrew Butter on June 22 2016 said:
    Liked your remark that the analysts who were caught flat-footed by the bust are perhaps not the best candidates to forecast when it will end

    One analyst was not caught flat-footed

    http://oilpro.com/post/24676/black-swan-spotterwhich-saw-oil-crash-coming-now-says-invisible-h

    He's saying $85 by Christmas (2016)

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