It has been a wild ride.
Crude began to run up in early 2007. It went from $50 a barrel to a peak of around $150 in mid-2008. Recession caused the price to plunge to $30 a barrel late that year. From there it began a second, slower climb that saw it break back above $100 in early 2011. Crude meandered between $100 and $125 until mid-2014, when increasing shale oil production from the US caused supply to outstrip demand by about 1% – 2% a year. That was enough to cause a second slide, again to $30, that appears to have ended this February.
Since then, the price has rebounded to $50 a barrel, where it sits now.
To recap: $50, then $150, then $30, then $125, then $30, now $50.
Where to from here?
We know that supply remains relatively steady, with additions to output from the Middle East offsetting falls in US shale oil liftings caused by lower prices. We also know that lower prices have stimulated consumption.
The past eight years have also shown us that crude can have exaggerated reactions to small shifts in supply and/or demand. So, in one sense, no knows what the crude oil market will do next.
On the other hand, we can set some parameters.
–the first is psychological. The oil price has fallen to $30 a barrel twice in the last eight years. The first was in the depths of the worst recession since the Great Depression. The second was during a period of general market craziness earlier this year (caused, I think, by algorithms run amok). I think it’s a reasonable assumption that prices will have a difficult time getting that low again–and if they do that they won’t stay there for long.
–the second is physical, and is about shale oil. Overall shale oil output in the US is now shrinking. Firms still pumping out shale oil are of two types: companies being forced by their banks to sell oil to repay loans; and companies whose costs are low enough that they’re making a reasonable profit at today’s prices. Cash flow from the first group is by and large going to creditors, so this output will diminish as existing wells are tapped out. That’s probably happening right now, since shale oil wells typically have very short lives. This means, I think, the question about when new supply comes to market–putting a cap on prices, and perhaps causing them to weaken–comes down to when healthy shale oil firms will uncap existing, non-producing wells, and/or begin to drill new ones in large enough amounts to reverse the current output shrinkage.
I’m guessing–and that’s all it is, a guess–the magic number is $60 a barrel.
My personal conclusion, therefore, is that the crude price may still have a gentle upward bias, but that most of the bounce up from $30 is behind us.