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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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.