Oil prices are down, but don’t expect a return to $60, or $30 a barrel
Oil prices are plunging. On Tuesday alone, the price of crude fell the most in one day since mid-2012. So what’s next for the price of crude?
Analysts expect oil prices to fall further, thanks to a double whammy of weakening economies and a supply glut. But don’t expect a return to the days when price of Brent— the global benchmark — was as low as $25 a barrel (in 2003), or even $60 (in 2005). Instead, most analysts say it might slip below $80 before stabilizing.
“I’ve been arguing for some years now that $60 was long-term price, but I don’t think we are at the point where we would see that,” Michael Lynch, the president of Strategic Energy & Economic Research, told Fortune. “I think you are more likely to see OPEC take some action to stabilize the price somewhere around $80.”
Most analysts said all eyes are on the Saudis, and further out, an OPEC meeting in November where member states are set to discuss first quarter quotas. But there remains an open question regarding how far Saudi Arabia— which needs oil revenue to supports its generous welfare programs— will let prices fall.
So far, the Saudis have been willing to let prices fall to hold onto their market share, The largest producer in the Organization of Petroleum Exporting Countries, Saudi Arabia in recent weeks has reportedly accepted a lower selling price for its customers in Asia and Europe.
“If the Saudis chose to dump more oil on the market, it could go down to $60. You dump an extra 1 million or 2 million barrels then $80 begins to look like a high price,” said James L. Williams, president, WTRG Economics.
“I don’t think they will,” he said. “I think what the Saudis will argue for at this (OPEC) meeting is no change in OPEC production,” he said. “I think if other members argue for cutting production, then Saudis will say you do it first and we will follow.”
Jan Stuart, global energy economist at Credit Suisse, said the Saudis have long seen themselves as a stabilizing force in the market and will at some point want to play that role in the current market.
“To put a floor in when a market is oversupplied, really what you saying is a supplier has to cut supply. In the case of oil, that supplier that cut in years past was OPEC as a group and, more recently, that has been narrowed down to Saudi Arabia and a distant second and third would be Kuwait and the UAE,” Stuart said.
“Really, it’s about Saudi Arabia choosing to stabilize this market or not,” he said. “The internal councils that make these decisions have, in our view for the past five, six, seven years adopted the strategy that they should be the quote unquote central banker of oil meaning that they in the final analysis supply stability … Until we know different, we think that the Saudi strategy is to remain and be the stabilizing force in that terribly important commodity market for oil.”
But it isn’t only about Saudi Arabia. According to an International Energy Agency report Tuesday, another challenge is the slowing economies in Europe and Asia that prompted it to predict demand for oil would fall slightly for the rest of the year. Further weakening especially in Europe could push prices even lower.
Then there are the oil traders. There will come a point— possibly as prices cross $80— where they will see prices reaching a point where they see a buying opportunity and jump back into the market.
“If they think it’s getting too low, they will buy in,” Lynch said. “So if it goes below $80, you will see some people saying, aha, OPEC surely will act so let’s buy now and they will stabilize prices.”