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The price of oil has jumped—but look for a flood of cheap fuel to beat it back

Pumpjacks taken out of production temporarily stand idle at a Hess site while new wells are fracked near Williston, North Dakota November 12, 2014.
Reuters/Andrew Cullen
In North Dakota.
By Steve LeVine
Published Last updated This article is more than 2 years old.

Oil prices rose today after five straight days of declines, but traders may finally be understanding that they have been inflating them for two months for no economic reason: the world is awash in oil, and the cost of drilling for more is lower than it has been in years.

Now, look for the following pattern, according to two big investment banks: continued fluctuation of oil prices, then a new dive that tests the breathtaking plunge early this year.

The US-traded benchmark, West Texas Intermediate (WTI), rose to $58.58 in European trading today, up 0.6% from yesterday’s close. But that follows a total price plunge of about 5% since last week. And, in a note to clients yesterday, Goldman Sachs predicted that WTI will fall to $45 a barrel by October, right around the February price, which was about 60% below the June 2014 peak.

It won’t get much better after that for oil-producing states, Goldman suggests—in the coming years, oil drillers will become more and more efficient in the shale patch, and keep prices stable at about $50 a barrel by 2020. That is $5 below Goldman’s previous forecast for that year.

As for internationally-traded Brent—the benchmark at which OPEC and other states including Iran, Russia, Saudi Arabia, and Venezuela sell their oil—it will be just $55 a barrel by then. That is far below the current price that all of them require to support their state budgets.

But if there is so much oil around, how did prices rise so much from their February lows? In a note to clients yesterday, Citi said that “hot money” from investment funds had poured into the market, bidding up oil futures. Such frenzied investor-buying, Citi said, had forced it to increase its 2015 price forecast by $5—to $56 a barrel.

But the bank said that even hot money could do only so much—WTI is effectively capped at $65 a barrel because, at that price, producers will respond by drilling more, thus flooding the market with more oil, and forcing prices back down. (In February, Citi forecast that, left to market fundamentals, WTI would fall to $35 a barrel during this quarter.)

Wall Street banks have generally raised their price forecasts for this year, while lowering it further down the road. According to a survey of 10 banks besides Citi and Goldman by The Wall Street Journal, Brent crude will average $61.62 a barrel this year, up a little over a dollar from a survey the paper conducted in March. Next year, the banks dropped their estimates—to $73.65 a barrel from $75.06.

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