A Massive Rally?
A consensus has been brewing among the world’s oil analysts that Crude Oil prices could hit a peak in 2020. As demand continues to grow and the U.S. proposes new sanctions on Iran, global spending cutbacks are setting up a supply shortage that continues to push oil prices higher in 2018. For IEA (International Energy Agency), it’s just a matter of time before prices reach a new all time high. And the exact time? 2020! But this level of forecasting precision has always been wrong in the past so why should we buy into these claims?
So why 2020? Oil inventories which have been steadily declining since 2016 as data from U.S. and western OECD (The Organization for Economic Cooperation and Development) reveals. These numbers are the most fundamental information that can be used to determine if there is actually less oil around thanks to OPEC supply cutbacks. Inevitably, lower inventories mean higher prices as supply does not meet demand. It is important to note however that inventory levels are not 100% representative of the total world supply. When OPEC reports total output it uses western data because accurate figures from its members are either unreliable or non-existent.
The prevailing school of thought is that the severe cuts to upstream spending that have stretched into a third year are sowing the seeds of a supply shortage around 2020. The IEA is probably the most recognizable forecaster that falls into this camp. The agency has repeatedly pointed to the fact that new oil discoveries are at their lowest level in 70 years. Alan Bannister of S&P Global Platts also echoed that warning, pointing to natural depletion of oil resources in the scale of 3 to 4 percent per year.
A Hard Fall?
On the flipside, an opposing camp of analysts have an entirely different view, expecting oil prices to remain relatively low for the foreseeable future. According to them the oil “price-depression” will continue for varying reasons. Some focus on peak demand, which mainly boils down to new alternatives to oil. The most fervent believers in both electric vehicles and autonomous vehicles argue that oil demand is nearing a peak, so there is little chance of another major bull run.
So, we have two dramatically different visions for what might play out in 2020. Historically, most oil price forecasts have been wrong. But inevitably supply will decline at some point because of spending cuts and as natural oil reserves continue to be depleted. Prices could therefore rise, but the question we should now be asking is: can they do it before renewable energy catches up?
*Please note that this article is not meant to be construed as investment advice or suggestion of an investment strategy with respect to any financial instrument.
Sources: JWNenergy, Forbes, Oilprice.com