AI view: what lies in store for oil prices?

AsianInvestor has answered 10 key questions for investors in the Year of the Monkey. Question seven looks at oil prices after their steep drop.
AI view: what lies in store for oil prices?

AsianInvestor’s editorial team set out this month to ask and answer 10 key questions for the Year of the Monkey, having consulted a range of industry experts.

Here we present our response to question number seven, with the other forecasts so far linked below. The feature appears in full in the forthcoming (February) issue of the magazine.

Question 7: Will oil prices continue to fall?
Answer: No

In January oil prices continued a steady decline, to the point where Goldman Sachs’ prediction last September (when the price was $50) that they could go as low as $20 a barrel in the short term does not look far-fetched any more. 

The factors behind that call have not changed. Overcapacity caused by strong US production of shale gas, the addition of Iran’s supply and the reluctance of the Saudis to cut their production are driving prices lower. Add to that falling demand from China and it’s easy to see why net long investors in oil are at their lowest level for five years.

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Having fallen 30% in 2015, oil dropped a further 20% in 2016, trading below $30 for the first time since 2003. Market dynamics will change over the longer term, especially once overcapacity is absorbed, probably by the end of this year. For 2016, the oil price will continue to suffer from deflationary pressures. 

The biggest downward pressure on price is rooted in the idea that Saudi Arabia will do whatever it takes, even to the detriment of its own revenues (oil is 75% of the country’s income) to hurt US oil producers and prevent Iran from gaining a stronghold within Opec. 

That means driving the price down to $10 if necessary. While this is an unlikely scenario the oil price was still edging downwards in late January before creeping above $30 at the start of February. 

Given the ‘lower-for-what longer’ view of many analysts, the “equilibrium” price (the medium-term trend, once overcapacity is dealt with) will be lower from 2017 onwards, probably $40 to $50 a barrel. Opec has stated that oil prices will not regain the $100 a barrel level until 2040. 

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