JNN 23 Dec 2015 New York : Another major global forecast has suggested that the oil price has a lot further to fall yet – and that it could go as low as $20 a barrel.
This is the extreme low “cost price” predicted since the autumn by Goldman Sachs for early next year. Now the International Monetary Fund has hinted that global prices could fall this low when Iran increases its oil exports in the wake of the lifting of international sanctions.
Iran reckons it could increase its output by around one million barrels a day. The oil would enter a global market that is already oversupplied by up to two million barrels a day. The IMF says this will bring renewed downward pressure on the beleaguered oil industry that will cause prices to fall from their current levels by between $5 and $15 a barrel,The Guardian reports.
Given prices are currently in the mid-$30s per barrel, this implies a fall back to the early 2000s level of around or below $30, or as low as $20. At this price it’s likely there will be a sharp decrease in investment and production that should see a sustained – and perhaps rapid – recovery.
The news comes after oil hit another 11-year low for the second consecutive trading session yesterday. International benchmark Brent crude fell to just a few cents above $36 a barrel, but Reuters says the rolling over of monthly futures contracts has prompted a modest recovery to around $36.60 a barrel this morning.
US benchmark West Texas Intermediate is now trading only marginally lower than Brent since the recent budget deal in the US lifted an export ban, with the price around $36 a barrel this morning.
As for the consequences of falling oil prices, the International Monetary Fund says it reckons the slump would mean a 0.3 per cent boost to the global economy next year. This would be the net effect of higher consumer spending as a result of fuel and energy bills falling, minus the drag of job losses and reduced investment.
On the downside, the Los Angeles Times’s Steve Yetiv says that the low oil prices worldwide are undermining arguments made at the Paris climate change summit this month that “burning fossil fuels is an increasingly costly habit”. If prices remain low for too long, he says, it “will hurt efforts to address climate change, especially in the US, where citizens largely oppose raising oil taxes”.
The oil price has plumbed new post-crisis depths, with the international benchmark hitting its lowest level since 2004 in Asian trading overnight.
Brent crude fell to just 17 cents above $36 a barrel, which means it breached the post-financial crisis low it set on Christmas Eve in 2008, according to the Financial Times. The last time it was below this level was when it briefly dipped into the mid-$30s in July 2004 during a protracted recovery from a trough in the 1990s when the price was at one point in single digit dollars.
While a fall to those extreme lows is unlikely, oil is expected to drop back to its early 2004 levels of $30 a barrel or less next year before it recovers in a meaningful way. Some experts even predict it will drop as low as $20 a barrel
Four factors that are fuelling this down trend – all in one way or another related to the persistent global supply glut – are being cited as reasons for the latest dip.
Top of the list of concerns is excess production. With oil having fallen by 70 per cent in the past year, global production was expected to fall as a ferocious turf war claimed swathes of victims, notably in the expensive American shale oil industry. But the sector’s unexpected resilience was underlined when the US energy watchdog revealed an increase of 17 in the number of active rigs drilling for oil last week, the Wall Street Journal reports.
A second factor is that supplies are already at record levels and stockpiles in the US surged by 4.8 million barrels last week, at a time of year when reserves typically fall, the investment bank ANZ told the FT. On the other side of the equation, a third issue is that demand is expected to be hit by a post-interest rate rise jump in the dollar, which makes oil more expensive for overseas buyers.
Finally, Brent is under particular pressure after the recent US budget deal that lifted a ban on US oil exports and is expected to reduce the international benchmark’s premium compared its US counterpart West Texas Intermediate. This latter fell to $34.37 overnight – a new seven-year low but still around $2 above its 2008 nadir.