How low can the oil price go?

Opec seems determined to keep pumping oil until it has sunk American shale producers. So how low is the oil price likely to fall?

Andrew Van Sickle
By
published
in Features

"Gloom nourishes gloom," says Commerzbank's Eugen Weinberg. Oil had another downward lurch this week, with both Brent and US futures slipping to seven-year lows around $35 a barrel and edging close to 11-year lows. Since oil cartel Opec's meeting a fortnight ago, oil has swooned by nearly 20%. This has sent the unusually commodities-heavy FTSE 100 index to a three-year low, down 10% since 1 January and 17% below its April record high. The Opec meeting removed any "last hopes of a reprieve for oil and added another layer of downside sentiment to commodities", David Hufton of PVM told the Financial Times.

Opec scrapped its production ceilingand, for now at least, seems determined to keep pumping until it has sunk American shale producers.Moreover, early this week Iran's deputy oil minister said there was "absolutely no chance" that Iran will delay its planned increase in oil exports now that Western sanctions are set to be eased. To cap it all, according to one trader, a ceasefire may be taking shape in Libya. "If Libyan production can go back up, the price effect is almost unthinkable." The Opec member's output has dwindled to around 375,000 barrels a day from 1.6 million before the civil war began in 2011.

Even without Libya, Opec supply is likely to rise by a million barrels a day in 2016, reckons Morgan Stanley. It sees next year's increase as stemming almost entirely from Iran, Iraq and Saudi Arabia. The upshot is that with demand growth unspectacular, the glut will last until at least late 2016, estimates the International Energy Agency.Given these fundamentals, and the"very nervous" market, "I think itwould be risky to rule out a $20 handle on oil", says Nasdaq energy analyst Tamar Essner.

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Bearish bets, or short positions by hedge funds and otherbig speculators in the US oil futures market, have jumped to a record high, while the number of people on the bullish side of the trade is at a five-year low. Whatever happens in the next few weeks, the upshot remains that "the path of least resistance is lower for longer", says Ron Insana on CNBC.com. And take predictions of a rebound in 2017 with a pinch of salt. History shows that oil bear markets can be protracted affairs.Oil tends to "spike, crash and thenremain depressed for years on end" lower for even longer.

Andrew Van Sickle
Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.

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