Don’t look for a sharp recovery in the crude oil price any time soon, it’s likely to oscillate between $35 to $55 per barrel for the remainder of the decade.
That’s that the view of Vivek Dhar, mining and energy commodities analyst at the CBA, who suggests that unless OPEC cuts supply in order to rebalance the market, the price is likely to be capped in the mid-$50 region due to the likelihood of marginal US shale restarting production.
“Oil prices should lift on average in 2Q16 and 3Q16 as US oil supply continues to track lower and demand picks up, but high OECD inventories, increasing Iranian crude oil output and a potential restart of US oil shale output at around US$55/bbl should lead oil lower again in 4Q16 and 1Q17,” says Dhar.
“OPEC crude oil output should lift by around 1 million barrels per day (mb/d) over the next year as Iran boosts output and as other OPEC members maintain current production rates.”
Beyond 2017, Dhar anticipates that “crude oil prices to steadily increase to US$50-55/bbl by mid-2018, before triggering another round of US shale oil restarts as cost reductions continue in the non-OPEC oil and gas sector”.
The chart below, supplied by Dhar, reveals the bank’s forecasts for WTI crude and Brent prices over the next 10 years.
Although the reasoning behind the call is perfectly reasonable, as anyone who’s attempted forecasting knows, it can be fraught with danger, and in some cases can lead to outright embarrassment.
Keeping this in mind, Dhar offers a series of factors that could scupper the bank’s forecasts, both to the upside and downside.
He suggests that a sharper-than-expected reduction in US shale oil production, an increase in global demand, particularly from OECD nations, an unlikely disciplined supply response from OPEC producers, an increase in industrial action and crude producers and further lowering of US rate hike expectations would all be supportive of crude prices moving forward.
Counteracting those upside risks, he notes that high OECD stockpiles, lower breakeven costs for US shale wells and stronger production could add to downside risks moving forward.
“Stronger production from OPEC nations in wake of the failure to secure a cap in crude oil output could weigh on crude oil prices. Saudi Arabia has already signalled this as a real possibility, potentially adding 2-2.3 mb/d of crude oil output,” says Dhar.
“This has the risk of leading to an all-out disintegration of OPEC, as member countries compete aggressively with each other to secure market share. Saudi Arabia is best placed to increase its market share as it accounts for around 2/3 of OPEC’s spare capacity.”
The chart below, again supplied by Dhar, reveals current OPEC production, measuring it against its potential daily maximum output.