Could Oil Prices Really Shrink to… $20 per Barrel?

Oil industry leaders have dismissed talk of the price of crude hitting the $20 lows predicted by analysts, who warned that believing that “oil prices will be with us forever may not be the right way of thinking.”

Goldman Sachs stirred energy investors last month when its head of commodity research warned of rising risks of oil prices falling as low as $20 per barrel.

Fatih Birol, the executive director of the International Energy Agency (IEA), told CNBC Tuesday low prices will prompt U.S. producers to cut output, creating upward price pressure.

“When we look at the next few quarters, we expect U.S. oil production to decline because of low oil prices and in Iraq, production growth will be much slower than in the past. And the demand is creeping up,” Birol told CNBC Tuesday from the annual Oil & Money conference in London.

“So therefore, to think that oil prices will be with us forever may not be the right way of thinking.”

The U.S.-led revolution in the extraction of shale gas via hydraulic fracturing or “fracking” has pushed more oil into the market. At the same time, the OPEC group of oil-producing countries have stood firm in the face of international pressure to cut prices. Meanwhile, Iraq has increased production, while demand growth for energy has slowed, largely due to the deacceleration in the Chinese economy.

This has helped catalyze an historic collapse in the price of crude oil, with both Brent and WTI trading below $50 per barrel, down from around $110 per barrel until June 2014.

Whether or not U.S. shale players will cut production in response to ongoing low prices is a moot point however. They could instead respond by increasing production in order to satisfy creditors eager for results. Plus, against some odds, shale producers have managed to lower productions costs, although these remain high in comparison to conventional oil production.

Despite its warning, Goldman Sachs said there was a less than 50 percent chance of oil falling to $20 per barrel. Instead, its base case scenario for 2016 was $45 per barrel—a level that Birol said was stilltoo low for U.S. shale producers to maintain current production.

“It is proven it is a very resilient type of production, but this level of prices, $45, $50 is not good enough to induce reinvestments and for production to continue to grow. Therefore, we expect as of next year, production growth will decline in the United States,” Birol told CNBC.


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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.