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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Why All The Experts Disagree On Oil Prices

shale rig

Oil price projections are infamously all over the map, but the current chasm between various pricing forecasts is striking, offering wildly different views.

On the low end we have Citibank, which recently stated that Brent oil prices could fall to as low as $45 per barrel within the next year. Citi’s Ed Morse said that Brent could very well fall back into a band of between $45 and $65 per barrel, a range that was familiar between much of the market downturn between 2014 and 2016.

The so-called “shale band” theory, popularized several years ago, posited that shale production would go offline below $45 per barrel, putting a floor beneath prices at that level, while any surge above $65 brought new supply online, which would push prices back down. Citi sees the recent run up in oil prices as temporary. “We think oil is headed back to that range by the end of 2019,” Morse said in an interview with the Financial Post in Calgary. “The bull argument is based on faulty analysis,” he said.

Morse argues that drillers are spending much more efficiently. “There should be no debate that the efficiency of capital has improved by at least 50 per cent since at least 2014. The doubts are whether that’s going to continue,” he said. “So far, those that have predicted cost reflation have been proven wrong, including in the shale plays.”

Moreover, drilling technology is also vastly superior compared to years past, which means producers can squeeze more oil out of wells while spending less. Finally, he argued that the assumption of significant decline rates are overblown, and he says that only about 40 to 45 million barrels per day (mb/d) will suffer from decline rates on the order of about 5 percent. Morse says most energy analysts apply assumptions about decline rates for most or all of the 100 mb/d of supply, which is not a reasonable assumption. Related: Strong Dollar Could Cap Oil Prices

Morse is certainly going against conventional wisdom right now, but he has been there before. His prediction carries extra weight because he rightly predicted the crash in 2014.

He may be on the pessimistic end of the spectrum but he is not alone. “We do not see material upside risk from current price levels during this quarter,” Barclays wrote in a recent note, arguing that “unless there are even further disruptions than baked into our balances, the fundamental market balance should weaken through end-2019.”

Barclays says demand remains strong for now, but high oil prices will undercut consumption. Both OPEC and non-OPEC production continue to grow, which means that, fundamentally, the oil market will return to surplus this year, with inventories building throughout 2019.

The investment bank sees WTI falling to as low as $61 per barrel in the third quarter of 2019 – not as dramatic as Citi’s prediction, but bearish nonetheless.

At the bullish end of the spectrum there is Goldman Sachs, although the investment bank has acknowledged a growing number of bearish risks to its forecast recently. The prospect of more Saudi production and a potential SPR release could spoil further gains to prices, but the forthcoming outages from Iran could push the oil market into a serious deficit – perhaps running at about 0.6 million barrels per day by November.

Goldman tends to be more bullish than other forecasters, but is sticking with a range of $70 to $80 per barrel for Brent for the time being. (A recent paper from economist Philip K. Verleger suggested that oil prices could shoot up to $200 per barrel because of new regulations hitting maritime fuels in 2020, but that forecast is an outlier). Related: Are Oil Markets Underestimating Iran’s Threats?

Bank of America Merrill Lynch goes a bit further, suggesting that Brent could rise to as high as $90 per barrel in the second quarter of 2019. However, a hardline from the U.S. on Iran remains a major upside risk (which is true for all forecasts). “In our view, a complete cutoff of Iran exports would be very hard to manage and likely result in an oil price spike above $120/bbl,” Bank of America Merrill Lynch wrote in a note in early July. “For now, the uncertainty around US government policy is leading to lower exports and an increase in Iranian oil in floating storage.”

To be sure, there are a variety of other forecasts that offer variations of these arguments, but anyone can find evidence and an oil price forecast from a prominent investment bank to back up any particular viewpoint they might have. Such is the unpredictable nature of the oil market.


By Nick Cunningham of Oilprice.com

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Leave a comment
  • Neil Dusseault on July 26 2018 said:
    I have to say, this is by far the single most balanced article I've read on OilPrice.com in the past 2 or 3 years.

    There is a lot of "click-bait" where headlines call for extreme high prices of oil comparable to recent prices and I have commented on almost every one of those articles, citing extreme favor to oil bulls.

    Thus, every conversation, every argument, and every article should be able to put the bigger picture into perspective when talking about the future price of oil. This article certainly accomplishes all that!
  • Frank on July 26 2018 said:
    Fundamentals say one thing and the agreed upon narrative says the opposite.
  • David Jones on July 27 2018 said:
    45 is too low in my opinion, they will not allow this if it can be helped. There probably hasn't been enough time at a high price to refill the cash reserves fur such a price drop. Anything above 100 will provide alternatives with a very favourable position so if the price starts moving up, the oil industry will do what it can to lower it. The current price is more or less the sweet spot and they will do what is possible to keep it in the range of 70-80, oil is in check so to say and if it starts cratering or flying out of this range it will enter check-mate territory. Either end of the extreme price projections probably cannot be maintained for long.
  • David Jones on July 27 2018 said:
    As an addition to my previous comment here, when I say oil industry interests will do what they can to keep the price in a good range for their purposes, I mean anything up to and including using dangerous political actions that carry long term diplomatic consequences to modify the situation. I would say the Iran situation points to and is just a taste of the kind of sponsored actions we can expect in the coming decades. Of course, US oil industry interests are not the only element in this particular instance but I would say we can be reasonably certain that they played a major role.
  • greg on July 27 2018 said:
    Now let me see...
    Citibank or Goldman Sachs, Citibank or Goldman Sachs...
  • Jeffery L. Surratt on July 27 2018 said:
    We have plenty of oil and continue to find more every day. I do not see prices going above $80, because at least in the USA, 10,000 boomers are retiring every day, in retirement they drive less. Also, millennials are not buying cars like previous generations. My youngest daughter is 26 and she does not even have a driver's license. She uses mass transit and gets rides from others, or walks to close locations. With the high cost of car ownership, many will choose to not buy a car in the future. I am 62 and can see a future at age 75 and beyond where I will not need to own a car. As more EVs come on the market gasoline sales will continue to fall. Supply and demand will push prices lower in the future.

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