It may sound far-fetched at a time when many are worrying if Brent could rise back to $50 a barrel, but at least one analyst believes the benchmark could not only recoup all that it lost in value since the start of the year but shoot up over $100 a barrel in the observable future.
"The reality is the chances of oil going toward $100 at this point are higher than three months ago," JP Morgan's head of oil and gas research for EMEA, Christyan Malek, said as quoted by CNN.
The reason is simple: the cyclical nature of the oil industry. In March, before the coronavirus pandemic really hit, JP Morgan's analysts issued a note saying the oil industry was entering a supercycle that could see the price of oil hit $190 a barrel by 2025. According to Malek, this is still a distinct possibility.
The forecast is not without a logical basis. The way cyclical industries work is that the industry produces a lot of the commodity when there is high demand for it. Eventually, supply begins to outpace demand for one reason or another. Prices then fall, the industry retreats and shrinks production to limit supply and stimulate higher prices. This brings a deficit of the commodity, which pushes prices up. This cycle repeats once every few years.
The current situation is fundamentally no different, according to JP Morgan's analyst, who expects the oil market to swing into a deficit sometime in 2022, which would push Brent to $60. This, in turn, will motivate producers to start pumping more crude. The deficit, Malek estimates, could reach 6.8 million bpd by 2025. This is what could cause prices to climb to $100 or more.
"The deficit speaks for itself. That implies oil prices will go through the roof," Malek told CNN. "Do we think it's sustainable? No. But could it get to those levels? Yes."
By Irina Slav for Oilprice.com
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Three major factors could contribute to this shock. The first is a steeply declining US shale oil production to a projected 7-8 million barrels a day (mbd) this year and even 7 mbd during the next two years.
The second factor is China’s unquenchable thirst for oil. China’s demand and its imports are already back to 2019 levels. Furthermore, China is on the way to full economic recovery by the end of the year. This is the more impressive given that many analysts estimated that China’s crude oil demand lost 20% and its economy shrank by more than 6.0% in the first quarter of the year during the pandemic.
The third factor is that global energy investments are expected to drop by an “unparalleled” 20% this year according to the International Energy Agency (IEA). Moreover, the pandemic has forced the global oil industry to defer as much as $131 billion worth of oil and gas projects slated for approval in 2020. This could result in a supply shortage of 15-20 mbd in the next 2-3 years sending oil prices rocketing above $100 a barrel.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London