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Is Raymond James’ $80 Oil Realistic?

Oil Rig

Crude oil prices have stabilised near the $50 per barrel mark, leaving traders confused as to whether the next 20 percent move from the current levels is going to be higher or lower. The divergent views of the experts don’t make the job easier, and instead, add to the confusion.

A Raymond James report forecasts an $80 per barrel oil price in 2017—a figure which is 60 percent higher than current levels.

On the other hand, A. Gary Shilling, president of A. Gary Shilling & Co., a New Jersey consultancy, and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation,” forecasts that oil will drop to $10 per barrel from the current levels, reports Bloomberg.

Further complicating matters, there is a Goldman Sachs report that says that the oil market will be back in a surplus by early 2017, reports Oilprice.

So which outcome currently looks most likely to become a reality in the future?

Supply disruptions

Though supply disruptions are not a new phenomenon, large-scale supply outages to the tune of 3.5 million barrels per day is significant, because it turns the supply glut into a deficit. Though it is easy to confirm that the Canadian supply will be completely restored, forecasting normalization of disruptions in Nigeria and Libya is more difficult. However, efforts are in progress in both places to bring supply back on track. Related: OPEC Needs 650,000 bpd To Avoid Global Supply Deficit

The result of these efforts was seen in Nigeria in June, where production increased from 1.3 million barrels per day in the early part of the month to 1.9 million barrels per day by the end of the month, as per Nigerian government sources. Nigeria is targeting production of 2.2 million barrels per day in July 2016, if pipeline repairs are completed, reports the Market Realist.

If Nigeria is able to do so, it will be a significant boost to the supply. As these disruptions are temporary in nature, any success with normalization will again lead to a supply excess.

US supply

Gone are the days when the world used to watch Saudi Arabia and OPEC exclusively. These days, the world markets are keen to understand what oil price level will bring the shale oil drillers back into full swing.

Crude prices of $50-55 per barrel are not high enough to rekindle the U.S. shale oil output growth, Anadarko chief executive Al Walker says. "At $50-55/bl, we don't cycle cash quickly enough to create capital investment for growth," he says. The industry needs "$60/bl or more, at service costs we have today, for the cash cycle to start," reports Argus media.

Therefore, a price anywhere between $50-60 per barrel should prompt some level of increase in shale oil production.

While the markets focus attention on the shale patch, we should not discount the outer continental shelf. An additional 500,000 barrels a day of new production from the Gulf of Mexico is set to come online this year and next, according to a Wall Street Journal analysis, which is enough to offset the 480,000 barrels a day drop in onshore production this year, reports the WSJ.

Hence, the loss in the U.S. supply, as anticipated, might not come about, and we might see the resilience of the U.S. oil industry continue. Related: Is Wall Street Right About Electric Utility Stocks?

OPEC and Russia

Considering that most of the OPEC countries and Russia depend on oil to fund their budgets, the supply is likely to increase in the future rather than decrease.

Russian Deputy Prime Minister Arkady Dvorkovich predicts "some increase" in oil production in Russia in 2017 and no decline in production, reports Tass Russian News Agency.

Most experts are in unison about robust demand growth both in 2016 and 2017, barring a recession in the world economy. Hence, any rise or drop in oil prices will be due to the supply-side factors.

Currently, the balance in the oil market continues. If the supply is restored, prices are likely to tip over, but if disruptions continue, oil is likely to rise to the $60 per barrel mark.

By Rakesh Upadhyay for Oilprice.com

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