Oil futures bet on a price below $70

Saudi Arabia has been claiming for months that the country is ready to increase its production and to gain market share despite the sharp oil fall. Mr Naimi explained in an interview for the Middle East Economic Survey, that since their production costs are minimum (barely $4-$5/barrel), the Gulf producers might endure a long period of low costs.

However, there are other oil-producing regions (such as Brazil, West Africa or the Artic) that wouldn’t be able to endure it. As a matter of fact, the OPEC assures that the barrel price will go back to $70 in 2016 thanks to the recovery of the global demand. This price is in line with the forecasts of most of the experts consulted by The Corner. According to Estefanía Ponte, director of the Economy and Strategy Department at Cortal Consors, “given the expectations of growth and supply, the oil will reach levels of $65/barrel at the end of 2015.”

Experts at Bankinter are in line with this forecast: “We think that the oil price is really close to minimum levels. On the very short term, it could fall a little further with the Brent barrel at $55. For 2015 we expect the price to go up to $60-$65 per barrel,” analyst at Bankinter Ramón Carrasco explains. For his part, Jason Wangler, analyst at Wunderlich Securities notes.

This new reality might lead to a reduction in the US production on the short term, as well as to acquisitions of the affected companies. Countries in need of a higher price level would also be hardly damaged (especially Venezuela, Russia and Iran), because they need to balance their public accounts. Meanwhile, those emerging countries that are most depending on oil (net importers), such as India or Turkey, and the developed economies would benefit from this.

According to David Kostin, expert at Goldman Sachs, “analysts and market players disagree about the possibility of a significant rebound in the oil prices for the next 12 months. Many clients share the opinion of the futures market, which point at a price below $70 until the end of 2015. However, oil producers consider that the rebound will be sooner, based on a poll carried out by Bloomberg that suggested a 35% raise of the Brent at the end of 2015, up to $82.”

Why is the oil price falling?

The price of the oil barrel has plummeted 50% since the beginning of the year. Is it feasible the hypothesis that hints at $20 per barrel? That is what some experts, such as the British economist and journalist Anatole Kaletsky or the financial analyst and contributor at Bloomberg Gary Shilling think. Commercial and strategic oil stocks all around the world come to 8 billion barrels, which is a record that has led to an oil surplus in the global market (there are around two million barrels per day). Besides, oil stocks have increased exponentially.

The exploitation-revolution of the shale oil in the US has provided over 4 million barrels for the markets in the last three years, which has contributed to the oil surplus and has also destroyed the OPEC’s monopoly. Furthermore, the end of the conflict in Iraq and Libya suggests that the oil supply will keep on increasing, while the OPEC members will maintain a constant production.

The oil demand hasn’t managed to pick up in a constant manner since the 2008 financial crisis. It is not very encouraging either that China, which is one of the larger oil consumers, is unable to grow above 7%.

There are some prices that need “fracking” and shale oil in order to be profitable. They range from $40 to $50 per barrel, which will be the price ceiling of oil in the future according to Anatole Kaletsky. As soon as the price exceeds it, the “fracking” will work so as to produce more oil thus making prices fall again because of the increase in demand… According to Kaletsky, we are entering a new era in which the oil price range will move between $20 and $50 per barrel for years.