Economists Weigh In: Can The Oil Rally Continue?
Oil prices have seen a serious rally since their $30/barrel low in January. But some speculate this is the market overheating, just as it did last year, and that we'll see another oil price slump.
Bisnow asked top economists to weigh in on whether we can expect the rebound to continue, or if we'll simply see a repeat of 2015.
"In the current economy, oil prices still represent a slump in demand but one thing is certain. This is a temporary condition. There is the presumption that since Saudi Arabia and other producers are trying to diversify their economies in the belief that the oil glut isn’t going away any time soon that oil prices are going to be more volatile. That, in my view, is not only unlikely but counterintuitive. The current price levels tested against demand patterns will remain somewhere close to the mid-40s per barrel and gradually increase in the next 18 months to $62/barrel, both because of increasing demand but also due to more limited production. As long as there is some level of world stability and not a roaring military conflict again, oil should rise in a predictable way. The increasing oil prices will eventually act for exporters as a catalyst to help the economy grow as well."
"First, I think it is likely that we have seen a bottom for oil prices. The sustained low level of prices we have seen over the past year is having an impact on production from high-cost regions like US shale and tar sands in Canada. Rig counts are near record lows. Reductions in output from these regions will help to limit the downside of any market decline. In addition, low prices have stimulated rising demand, particularly for gasoline. So we have probably seen a bottom."
"Secondly, I do believe the recent rally is overdone and there will be a correction (are we in it already?). The rally has been partially driven by temporary disruptions of supply in Libya, Iraq and Nigeria that are likely to end soon. In addition, the market has yet to see any significant increase in production out of Iran now that sanctions are being lifted. Combine a new supply source with the inability of OPEC to agree on production cuts and there is very little likelihood that prices can rise substantially."
"Thus, we believe that there is a floor and a ceiling for the near-term movement of the price of oil. Any increase in prices will be followed by a correction as supply remains abundant, but any decline will lead to further cutbacks in high-cost production. Overall prices will tend to move sideways during the balance of 2016."
"I think the oil supply situation is a lot like real estate development. When you have the site and the funds, you go ahead irrespective of the market with full knowledge that you need to get buyers in the short run at a price that is at least at breakeven. There are players in the oil market who have lower breakeven price points than today’s pricing, and depending on their initiatives, the price of oil can go either down further or stem its downward direction. (And developers with lower basis win the fight for tenants and others lose out.)"
"The situation is not driven by market forces, but by the political, strategic initiatives of the players. The good news is that the traditional energy costs are lower, as is general inflation; the bad news, the renewable sources are not cost competitive."
"The driving force behind low oil prices is supply—and supply suggests the glut is still with us. US oil production is still running close to record high levels and inventories of crude have continued to rise over the last few months to record levels. It's hard to see this as an environment where oil prices have the ability to rise in a sustained manner."
"My trusty research director in Houston, David Wegman, tells me the price of oil is range bound. Despite the recent price run-up, a fundamental supply/demand imbalance persists, which limits pricing to the upside. However, sub-$30 oil coincided with a short-covering rally and a fear earlier this year that the US was sliding into recession, which it didn’t. We expect no major price movements this year, with equilibrium and higher pricing next year and into 2018."
