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Page added on May 31, 2017

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4 Wildly Different Oil Price Scenarios For 2020

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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.

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.

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.

oilprice.com



13 Comments on "4 Wildly Different Oil Price Scenarios For 2020"

  1. rockman on Wed, 31st May 2017 9:44 pm 

    “For 2017, analysts are converging on a consensus for oil prices”. I wonder if these same “analysts” also converged on the consensus that oil would fall from $85/bbl in 2015 to $41/bbl in 2015? Or did they feel prices would stay in the $80’s because that was where they were. Just like assuming prices will stay where they are because prices are where they are.

    Always easier to go with the status quo. Until it ain’t status quoish. LOL. Everything stays the same…until it doesn’t.

  2. Anonymous on Wed, 31st May 2017 10:36 pm 

    Exports from the US are up sharply.

    https://seekingalpha.com/article/4077671-exporting-oil-glut

    And I know we are a net importer still. Blabla. Still interesting why so much being exported now. Is it the change in export ba…restrictions? Dock changes in Corpus? Chinese discovering how nice Bakken oil is (almost like WTI and even with enough benzene but not too much).

  3. rockman on Thu, 1st Jun 2017 9:26 am 

    A – ” now. Is it the change in export ba…restrictions?” No meaningful changes since the so called “ban” became law in the 70’s. President Obama lifted the ban in Jan 2016. That year we exported 190 MILLION BBLS. But in 2015, before the “ban” was lifted, the US exported 170 MILLION BBL. Since the “ban” on exporting US oil we’ve exported 1.4 BILLION BBLS OF OIL. Proof from the same govt’s EIA that passed the “export ban law”:

    https://www.eia.gov/dnav/pet/pet_move_exp_dc_NUS-Z00_mbbl_a.htm

    Why? The US consumer has always competed with foreign consumers not only for oil but also refinery products. Not even a phony ban on refinery exports. See above link: in 2016 the US exported 1.7 BILLION BBLS OF REFINED PRODUCTS.

    Same true for NG and coal: exports have always been unrestricted.

  4. rockman on Thu, 1st Jun 2017 9:40 am 

    BTW while China might like US light oil but the Canadians JUST LOVE IT. Consider 2016 exports:

    China – 8 million bbls
    Canada – 110 million bbls

    Even our European cousins like our oil more the China: In 2016 we shipped 14 million bbls to the Netherlands. It re-exports a lot of oil to other EU nations.

    And refinery products? In 2016 China received 65 million bbls while Mexico got 300+ million bbls.

  5. Midnight Oil on Thu, 1st Jun 2017 11:04 am 

    Sure they LOVE…got to mix it up with that Tar goo they rip out of the Earth, leaving behind a wasteland…
    What’s not to “love”? OY!

  6. rockman on Thu, 1st Jun 2017 12:21 pm 

    MO – “What’s not to “love”? OY!”. Of course, what’s not to love. I have no doubt you loved paying $1.87/gal in March 2016 instead of $3.68/gal in 2012. Of course, prices are recovering but paying $2.50/gal today instead of $3.68 is better for you. But not so much for those “wastelands”

  7. yoshua on Thu, 1st Jun 2017 1:03 pm 

    The etp model predicts that WTI will fall to $10 p/b in 2020. That is the economic value of the net energy in a barrel of crude in 2020.

  8. Bob on Thu, 1st Jun 2017 1:06 pm 

    Wildly different oil price predictions… Gee, what else is new in the world? The “experts” have had wildly varying price predictions for as long as I have been alive (70 years now). Time to forget about their predictions and get to work trying to make a better world.

  9. rockman on Thu, 1st Jun 2017 10:31 pm 

    yoshua – “…WTI will fall to $10 p/b in 2020. That is the economic value of the net energy in a barrel of crude in 2020.” No, it isn’t. We don’t know what it will be 31 months. What we do know: oil been selling in a narrow around $49/bbl for the last 12 month. The trend in the low points have progressively increased during that period from $40/bbl to $45/bbl. Source:

    http://www.macrotrends.net/2516/wti-crude-oil-prices-10-year-daily-chart

    Global oil production peaked 6 months ago and has since declined slightly about 2 million bopd…coincidental with the price of oil slightly increasing over the same period. Source:

    https://ycharts.com/indicators/world_crude_oil_production

    So according to you the “model” is predicting oil prices will fall about 80% in the next 31 months. Then two questions, if you please. First, did the “model” also predict the slightly increasing price trend of the last 12 months? Second, if it did then when does the “model” predict the price trend to reverse itself and begin the highest rate of decline by far in the entire history of global oil production? One must assume it will begin declining very soon since it needs to fall 2.5%/month even if it started to slide tomorrow.

  10. Anonymous on Thu, 1st Jun 2017 11:55 pm 

    Look at the graph, Rock. Crude oil is up to 1MM bpd exports.

  11. deadlykillerbeaz on Fri, 2nd Jun 2017 3:39 am 

    The price of oil is going to fall to under 43 USD soon.

    Here’s why: the price of a metric ton of oil in yen is 34,600.

    34,600/111.5=$310.31, the price of oil in dollars per metric ton.

    310.31/7.3=$42.50 for a barrel of Ghawar field oil delivered to Japan.

    Oil is going to fall in price, looks that way from Japan.

    Spend 74 dollars US, buy 100 Canadian loonies.

    Spend a dollar, buy 111 yen.

    When the yen falls to 90 per dollar, trade the yen back to dollars. You’ll have an extra 21 yen, a gain.

    You’ll be making a 20 percent gain and more just by buying Canadian dollars and Japanese yen, just have to wait for the value of yen and the loonie to increase.

    They will. Don’t need no stinkin’ oil, just 100 million dollars to buy yen and loonies.

    http://www.kitco.com

    Although, I am short about 99,999,999 dollars, as usual. lol

  12. yoshua on Sat, 3rd Jun 2017 9:45 am 

    Rockman

    The model predicts that the oil price can be at or below the Maximum Affordability Curve but above for a long time since that would crash the economy.

    The oil price can move up and down below the MAC. Nothing moves in a perfect curve… Well… except for the MAC which predicts the point in time when the oil industry and the global economy will crash and burn.

    The decline has already started and has been ongoing for some years now. At times it has been a violent decline. At times it has been a modest decline. And at times there has been some recovery up towards the MAC. But the price has not broken above the MAC.

  13. yoshua on Sat, 3rd Jun 2017 9:49 am 

    …but not above for a long time…

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