Is the era of cheap oil gone for good?

Wall Street banks lift long-term forecasts by $10 or more

Could the era of cheap oil supply be gone for good? That’s the conclusion of some of the biggest commodities desks on Wall Street, where banks have been lifting their long-term price forecasts, often by $10 or more.

While the US shale boom brought about a “lower-forlonger” mantra, the market is now fixated on climate change and the dwindling appetite to invest in fossil fuels. Instead of growing supply, companies are under pressure to limit their spending, causing a structural underinvestment in new production that — the argument goes — will keep oil prices higher for longer.

“My advice to clients is that you want to stay long oil until you know where that equilibrium price is” that brings new supplies online, said Jeff Currie, head of commodities research at Goldman Sachs Group Inc. “We know it’s above these levels because we haven’t had a big uptick in capex and investment.”

The notion of a supply gap is nothing new. Since prices crashed in 2014, analysts have talked up the potential for demand to outstrip production as a result of underinvestment. But the rout in energy prices from Covid-19, combined with pressing environmental concerns, offer reason to think this time is different.

The number of oil and gas drilling rigs globally may have recovered from the lows of when oil prices turned negative last year, but they are still down more than 30 per cent on the start of 2020. Current figures are about as low as they were in 2016, according to Baker Hughes Co.

Future view

Among the banks seeing higher prices for longer, Goldman says $85 for 2023. Morgan Stanley bumped what it calls its long-term forecast up by $10 to $70 this week, while BNP Paribas sees crude at almost $80 in 2023. Other banks including RBC Capital Markets have talked up the prospect of oil being at the start of a structural bull run.

Such estimates imply that a commodity vital to the global economy has become structurally more expensive.