That’s according to the guys over at Capital Economics — they had been expecting a drop in the oil price, but they didn’t think it would fall to $US80 per barrel (as it did Wednesday and Thursday) until 2016.
So they’re accelerating their forecasts and suggesting the world will “soon be awash with oil,” cutting the per-barrel Brent Crude price to just $US70 (£44.4) by the end of 2016, four years earlier than they previously anticipated.
Here’s the basis of their bullish case:
- Less risk from the Middle East. The turmoil and wars around the Arab Spring have kept prices elevated, but the outlook isn’t quite as dramatic anymore.
- Saudi and the other Gulf states aren’t particularly unhappy. Despite the drop in prices, there’s been no knee-jerk reaction from the Arab world’s massive oil producers yet.
- Demand is likely to be weak. Even if OPEC, the oil producing countries’ cartel, did cut supply, demand is pretty weak. With a modest to poor growth outlook for most of the world’s advanced economy, and a slowdown in China, Capital Economics’ Julian Jessop and Thomas Pugh think there’s going to continue to be downward pressure on prices.
- Other factors could offset the drop in shale production. Falling oil prices will most likely hurt US shale production because of the relatively expensive cost of extracting the gas. But that is likely to have a limited effect, and other potential factors like a loosening of sanctions on Iran could have a much larger effect and push prices down further.
Though they’re forecasting $US75 per barrel by the end of 2015 and $US70 by the end of 2016, they add: “Given the current negative sentiment in the market, it is clearly possible that $US70 could be hit much sooner … we believe that lower oil prices are here to stay.”