Can the oil price ever recover?

Speculation is rife as to where the oil price will go, but we have the definitive answer: It’ll be somewhere between $5 and $200…

That is, at least, the extremely broad range offered by a deeply divided industry, with forecasts depending very much on whom you speak to, and when, writes Ben Flanagan.

Goldman Sachs in 2008 famously – or rather, with the benefit of hindsight, infamously – forecast an impending era of $200-a-barrel oil. In September it revised this, somewhat drastically, saying the price could fall to just $20 this year, in the worst-case scenario.

Others have even gloomier predictions, with Standard Chartered saying that oil could bottom out at $10. At the World Economic Forum in January, there were even mutterings that the price could reach a low of $5. Others point to a less alarming level of $40 by year-end.

Oil still at $40… in 2035?

While there is little consensus in the industry, most agree on at least one thing: Oil is unlikely to recover to $100, yet alone $200, anytime soon.

That’s certainly the view of academic Roberto F. Aguilera, research fellow at Curtin University in Perth, Australia, and co-author of ‘The Price of Oil’.

In the book, published last November, the academic forecasts that the oil price will stand at just $40 by 2035 – something he attributes squarely to the so-called shale revolution in the US.

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Weak demand due to global economic jitters, a glut in supply and – mainly – the impact of shale are behind the recent 18-month nosedive in prices, says Mr Aguilera.

“We believe that the period of high prices we saw over the past decade has come to an end. Because, in our view, the shale revolution in the US is really just a humble beginning,” he told Benchmark. “Its continued expansion, combined with the international spread of the revolution, will assure much more ample oil supplies, and will deliver prices far below the $100 level that we have experienced recently.”

Although his book presented different scenarios, with oil at different price points 20 years into the future, Mr Aguilera said the $40 level is looking “increasingly likely” given the trends seen over the last couple of months.

More bullish outlook

Daniel Ang, investment analyst at Phillip Futures in Singapore, sees oil prices making a much more rapid recovery – but not to the $100 levels seen previously.

“I expect prices to peak at about $80 at most in the longer run. As prices stay low for a longer period of time, it is likely that expensive forms of production would continue to feel the pain and thus, cut back on production. It should only be a matter of time,” he told Benchmark.

Mr Ang says he has a “bullish” outlook for this year, with prices set to average $40 in 2016 despite the weak prices seen during the first half. And with sanctions on Iran having been lifted, the market can start to account for that.

“The return of Iranian oil has kept the market on a more bearish sentiment, and with this out of the way, prices would account for this and move down in the short term. However, in the longer term, I do not expect to see [many] more major milestones that could bring prices down further,” he said.

History lessons

We know that what goes up, must come down. But what lessons can we learn from history as to where the oil price may start rising again?

Mr Aguilera said that political events such as the Iranian revolution, and conflicts such as the Iraqi invasion of Kuwait, have been behind historic spikes in oil prices.

While he does not rule out geopolitical forces prompting similar increases as those seen in, say, the 1970s, Mr Aguilera says things are a different this time around.

And that is due to the widespread availability of shale resources – not just in the US, but in numerous other countries globally.

“The difference now is that you have this abundant supply,” Mr Aguilera said. “New technologies are here to stay. And because of that we won’t see shortages for the next few decades.”

Certain parts of the Middle East are hotbeds of instability – but the more widespread geographic availability of shale means that local tensions are likely to have a lesser impact, the academic said.

“This large supply increase is less concentrated than before. It has diversified supply because shale resources are widely distributed. So the effect there is that the world is less prone to supply disruptions,” said Mr Aguilera.

Saudi tactics

But for one expert on Gulf oil, history is indeed repeating itself.

Jean-Francois Seznec, a non-resident senior fellow at the Atlantic Council, said that Saudi Arabia is replaying tactics it has used in the past in an attempt to drive up prices.

In previous oil crises – such as that seen in 1998-1999 – the world’s biggest crude exporter continued pumping despite low prices, with non-Opec members such as Norway and Mexico eventually agreeing to cut production.

“I think this is the policy that the Saudis are playing now, trying to make things so tough on people that they will actually agree to cut. And once they agree to cut, then the price will recover. It maybe won’t go to $120, but the Saudis will make sure it stays between maybe $60 and $80. The Saudis would like $80,” said Mr Seznec.

“The production doesn’t have to be cut much, and the Saudis have indicated that they… would work with non-Opec members,” he added. “I think if the Russians would agree to cut production a little bit, say half a million, then the Saudis would match, and then the price would go back to $50, overnight.”

But again, the difference today compared with previous oil price crashes is the ability of the US operators to increase shale production in a matter of months, said Mr Seznec.

“The big difference today is… the ability of the shale oil folks to get back in the market very quickly, which is new. And the second one is what is going to happen [with] Iran, how much oil Iran is going to put on the market, and how the markets perceive that,” he said.

Mr Seznec sees oil recovering to $50 or $60 within a few months. But can it return to $100 in the short or medium term?

“Unless there was actually war between Iran and Saudi Arabia, no,” he said. “And I really don’t see that happening.”