Are oil prices really headed to $75?
Barron’s recently released an article entitled “Here Comes $75 Oil” outlining the death of “peak oil” and their forecast for lower oil prices going forward [link to Barron’s article here].
They point out the usual suspects: cars and trucks are becoming more efficient, slowing growth in emerging economies, a shift to more electric and natural gas vehicles on the road. The past 5 years has also seen an unprecedented explosion in unconventional crude oil production – over 1 trillion barrels so far from sources that include shale, deepwater oil and the Canadian oil sands.
Options traders would certainly agree with this theory. West Texas Intermediate (WTI) crude prices have been in steep backwardation for some time. This confirms the finance market consensus that future oil prices will be lower than today’s prices. US oil production is growing quickly, adding to the already high inventory levels. In the next 5 years, the US is anticipated to be exporting oil for the first time since World War I. Imports of medium and heavy crudes from Canada and Mexico will almost completely eliminate the need for imports from OPEC producers.
Of course, lower oil prices would be good news for the US economy. About 90% of US transportation needs relies on crude oil. Cheaper gas puts more money into the pockets of working class families and reduces the price of food and other transported goods. Lower gasoline prices would definitely help boost the sluggish US recovery.
However, analysts at Credit Suisse are challenging Barron’s theory. There’s no question that the cheap and easy oil has already been found. Supply is undoubtedly becoming more challenging. Production from Libya has yet to recover to pre-civil war levels. Output from Iraq has not ramped up as quickly as hoped. Oil majors like Shell and Exxon struggle to meet and grow production targets. Oil companies are increasingly shifting production to more challenging environments and deposits. This would suggest that $100 oil is perhaps the new normal and we should just get used to it.
Let’s not forget that when oil prices hit $147/barrel in June 2008, Goldman Sachs, who had previously called for $200 oil, raised their price target to $300/barrel. The world was running out of oil and global demand was going to eventually outstrip supply. That was merely 6 years ago. By the end of 2008, oil prices had crashed to less than $35. Lest we forget that technology, world economies and geopolitics can change quickly. So the market doesn’t always get it right.