You would have thought the world was ending yesterday by people's reaction to Goldman's "$20 Oil" report. I read the report, and they aren't forecasting #20 oil -- just said it could be a possibility. The Goldman forecasts are in the high 30's to mid 40's over the next 12 months. But still, it's an interesting topic to debate. I've heard people debate both sides over the last few months but am curious what the WSO community thinks.
Is oil going to have a rally over the next months/year, or is $20 oil in the foreseeable future?
Very unlikely. OPEC likes to have an image of a cartel but they rarely if ever act like one. For $20 per barrel most oil producers will have MAJOR trouble simply existing.
In May of 2008 GS said oil would hit 200, less than a year later in February 2009 oil was trading at 45. The last time oil was near 20 was in 1999 and the time before that was 1973. We probably wont see oil at 20 anytime soon.
I don't trust Goldman's forecast in this instance. That's not really a possibility because either demand will increase or wells will get capped before $20.
Yeah that was my point. GS is not known for accurately predicting oil prices; often times they take opposite positions, or have their clients take opposite positions, of what they say publicly.
Didn't read their report, but I think what they are saying is that oil may touch $20/bbl for a brief period of time? Obviously it cannot be sustaining at that level due to cost of a marginal barrel being higher for most of the plays, although some of the best shale plays' costs are in the low 20s. One of the problems with E&P companies is that they may not have the flexibility to simply shut down immediately in response to the decreasing price.
I think the reason markets would freak out about the possibility of $20 oil is because U.S. energy production has contributed disproportionately to U.S. economic growth. The possibility of that sector in total collapse is justifiably frightening.
Won't happen, too much existing production would shut down before oil hit $20. By around $31-33 / bbl domestic production would be down to a point where global supply demand bbl / d would be balanced.
You read CNBC too??!?!?!
GS continually tarnishes their own reputations with these kinds of remarks. $20 per bbl is mechanically impossible - you will probably need China demand to shrink by at least 20% in the span of a month for that to happen. Production from US shale basins also have not been slowing down despite that rig counts are at lows - in fact, production across all 7 basins are still rising. And EnergyHou is right as well.
Any number between $0 and $200 exists in the distribution of possibilities. However, the more you move to either extreme, naturally the less likely that outcome is. Also, let's specify what kind of oil we're talking about. I didn't read the GS report but I'm assuming they were talking about WTI. Technically you could say that oil has/is/could trade at $20 if you are talking about certain heavy oils (like Arab heavy or WCS) that trade at discounts to WTI.
It's unlikely for WTI to trade at $20 though. Also, I'd argue that it's not meaningful even if it did trade at $20 for a short period of time. Any price for WTI below, say, $60ish is unsustainable. You need, approximately, $60+ for oil sands (because as I mentioned WCS trades at a discount), $50-60+ for most shale and shallow offshore, $70+ for deepwater, and anywhere from $50 to $150 for various OPEC members.
We could see lower prices (sub $60) over the next 12 months but I can't forecast oil prices. Long-term though, IMO, we need $70+. Even the Saudis are cutting back public investment spending because their budget is built on $90 oil. Also, prices at these levels are leading to chronic underinvestment by companies across the board which will have to be offset in a few years by much higher spending just to replace current supply.
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