After the nine-month extension of the OPEC deal, there is a growing consensus that oil might bounce around in the $50s and $60s for the rest of the year. But as we move into 2018 and beyond, there is a great deal of disagreement among analysts about what happens to oil prices.
One school of thought is that the severe cuts to upstream spending that have stretched into a third year are sowing the seeds of a supply shortage around 2020. The IEA is probably the most recognizable forecaster that falls into this camp. The agency has repeatedly pointed to the fact that new oil discoveries are at their lowest level in 70 years. "There were no discoveries because there is no money for exploration. You find something if you look for it," the IEA’s executive director Fatih Birol said earlier this year.
The IEA says the industry must step up spending if they are to avoid a supply crunch in a few years’ time. “[W]e are emphasising an important message: more investment is needed in oil production capacity to avoid the risk of a sharp increase in oil prices” by the early 2020s, the IEA wrote in a March report.
Alan Bannister of S&P Global Platts echoed that warning more recently, pointing to natural depletion from conventional oil production – which still makes up the vast majority of global supply – on the order of 3 to 4 percent per year. “We’ve not really seen the effect of that yet, because all the projects that were put in place three years ago when prices were high are still being completed – we’re still seeing extra volume coming on,” Bannister told CNBC in an interview. But because the sharp cutbacks in upstream spending means that there will be many fewer barrels coming online to replace depleting fields, “it does sow the seeds for a potential super bull run…It could go well over $80 in the next two to three years,” he added. Related: Saudi Prince Mohammed Meets With Putin To Discuss Oil, Syria
But other analysts have an entirely different view, expecting oil prices to remain low for the foreseeable future, although for varying reasons. Some focus on peak demand, which mainly comes down to alternatives to oil. The most fervent believers in both electric vehicles and autonomous vehicles argue that oil demand is nearing a peak, so there is little chance of another major bull run. Tony Seba, co-founder of tech-focused think tank Rethinkx, says that demand will peak by 2020-2021 and will plummet thereafter, forcing oil prices down to $25 per barrel by 2030. "At $25 a barrel, that means deep-water, sands, shell oil, fields, most are going to be stranded, and also all the refineries and pipelines associated with these expensive oils are also going to be stranded,” Seba told CNBC.
Even if more mainstream oil forecasters don’t see such a dramatic scenario on the horizon, they do see some supply-side forces that prevent an oil price spike. Namely, improving technology and falling breakeven prices for shale production could put a ceiling on the price of crude for the next few years. For example, Morgan Stanley just downgraded its forecast for Brent in 2020 from $70-$75 to just $60 per barrel. The investment bank said that about 1.5 mb/d of new supply that it had expected would be needed in 2020 will no longer be needed because of much better results from shale.
Goldman Sachs agreed with that sentiment a few weeks ago, stating that they are growing more confident that longer-term oil price range is “drifting lower.” Goldman says it sees lower prices over the next five years because of the “growing visibility on the sources of future supply.” And they also pointed to the resilience of U.S. shale as a principle reason for oil prices remaining low not just for the near-term but into the 2020s. Goldman cites the surprise profitability of shale companies today even though oil prices have bounced around at $50 per barrel, their ability to ramp up supply, and the abundant capital that Wall Street is willing to shower on shale drillers. Related: Is This The "Mystery" Massive Long Supporting The Oil Market?
So, we have dramatically different visions for what might play out over the next five years. On the one hand, there are those worried that the depth and length of the current downturn will merely create a stronger bull run in five years. Today’s cutbacks create tomorrow’s shortage.
On the other hand, there are those that think the oil market is fundamentally different than in the past. Shale has truly altered the supply picture, and the downturn in prices has been met with steady innovation, leading to the cost of the marginal barrel to structurally fall. As a result, oil prices could remain low for years, if not forever.
For 2017, analysts are converging on a consensus for oil prices, but the forecasts for what happens after 2020 are diverging.
By Nick Cunningham of Oilprice.com
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