Oil prices have surged about 25% in recent days, but that’s of little consolation to the oil drillers, investors, and petro-autocrats who have suffered a 14-month-long price plunge. Though they may think otherwise, they are almost certain to endure another plummet and at least another year of relatively low prices, say key analysts.
Last week, prices came off their 2015 lows in dramatic fashion. On Aug. 27, Brent crude rose 10.2%, its largest one-day advance in nearly seven years. The next day, Brent rose another 5.2%, taking the price back above the symbolic $50-a-barrel threshold. On Aug. 31, Brent soared by yet another 8.2%.
But today (Sept. 1) we see signs that the oil market understands that the rally was “another false start,” as Citi said in an Aug. 31 note to clients. As of this writing, traders had bid down Brent by 7%—back below $50 a barrel.
Last week’s rally belied the fact that an oil surplus continues to slosh around the market. As Goldman Sachs pointed out in a note on Aug. 31, the 485,000-barrel-a-day surge in OPEC production between April and June of this year overwhelmed a 316,000-barrel decline in US production.
The reason for the stubborn surplus is that, despite the relatively low prices, drillers around the world continue to produce at breakneck speed with an eye on retaining market share once prices—as they eventually must—go back up.
Before they do turn around, prices are likely to drop very, very low—and stay there for a few years. At that point, sufficient numbers of producers will either voluntarily shut down their drills, or be forced to, and thus shrink the global oil supply.
Until then, look for more of this downward trend, with some oscillation. It could go on for a long time: Vitol, the world’s largest independent oil trader, thinks that oil will trade in a $40- to $60-a-barrel band through the end of next year and possibly into 2017.
Nick Butler, a former BP executive who blogs at the Financial Times, thinks no one should hold their breath. Low prices, he says, could last five years or more.