Is oil headed back to $100 a barrel?
WASHINGTON — Between the huge influx of crude coming from Texas shale fields and forecasts the gasoline-powered car is headed for extinction, it’s not hard to see why some investors are betting low oil prices are here to stay.
But one prominent analyst, Bob McNally, president of the Washington consulting firm Rapidan Energy Group, is warning that those naysayers are wrong and oil is headed back to $80 or even $100 a barrel.
“We are absolutely telling our clients to bet on it. Boom is going to follow bust,” he said, speaking at a United States Energy Association event in Washington last week. “The consensus is going to be shocked at how strong demand is for oil. This idea that peak demand for oil in transportation is eminent as electric vehicles ramp, I think is misguided.”
Oil prices surged above $60 a barrel earlier this month following an attack on a major oil field in Saudi Arabia, but they have since retreated as concerns about slowing demand, a weakening global economy and abundant supplies resurfaced. An increase of more than 3 million barrels in U.S. crude inventories added to downward pressure on oil prices.
Oil is trading around $50 a barrel, less than half what it was in 2014 when the first iteration of the U.S. shale drilling boom reached its peak. Soon after, the flood of crude from American shale plays and OPEC’s refusal to reduce their supply combined to crash the market — with prices falling below $30 a barrel in early 2016.
Up and down
Prices recovered from that low and reached a peak of $76 a barrel a year ago. That was followed by another plunge at the end of 2018 that pushed prices back to $40 a barrel. Prices rebounded again, but have been unable to break out of the $50-to-$60 a barrel range, despite OPEC production cuts. Even with oil companies pulling more than 200 drilling rigs out of operation since the beginning of the year, the United States is still producing at near-record levels above 12 million barrels a day.
OPEC has long acted as a so-called “swing producer,” adjusting its production to keep prices relatively stable. But the cartel’s willingness to play that role is now in question, McNally said, and the market is left without a swing producer for the first time since the earliest days of the oil industry.
“Now spare capacity is very low, maybe 2 million barrels a day in a 100-million-barrel-a-day market. In the ’90s we at least had 5 percent,” he said. “We have a lot of chaos and risk in disruption in the world. When you don’t have a swing producer it’s like living in a wooden city, and if you don’t have the fire trucks any small fire threatens to spread quickly.”
Analysts eyes are firmly pointed at the Persian Gulf, where the attack on a critical oil facility in Saudi Arabia and a series of tanker seizures by the Iranian military have set off fears that Iran intends to disrupt the massive crude supply coming out of the region.
More attacks
McNally said he believed that Iran, which remains under U.S. sanctions over its nuclear program, would eventually strike a deal with President Donald Trump, who ended an earlier deal struck by the Obama administration. But he added there might be more attacks before that happens.
“Right now, the Iranians are looking a little more impatient than Trump is willing to strike a deal,” he said.