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Thursday, June 2, 2016

Analysts Continue to Disagree About Where Oil Prices Will Go From Here

Uncertainty over the response of U.S. drillers to increasing oil prices, as well as continued questions about what OPEC will decide to do with production levels, continues to lead to varying projections of what to expect going forward.

For instance, Business Insider says $50 oil is here to stay:
Some might question the validity of this data, and to be sure breakeven estimates run the gamut. But, if the industry could make money in U.S. shale at $40 or $30 then there would not be more than 70 shale companies that have declared bankruptcy. If breakeven prices were that low, the rig count would not have collapsed by 75 percent in 18 months, nor would U.S. oil production have ground to a halt and then plummeted by nearly 1 million barrels per day since last year. 
Clearly, prices are substantially too low for many drillers to make money. As a result, despite predictions from the EIA and others that oil prices could stay low for much longer – the EIA expects WTI to average $50 in 2017 – prices are still unsustainably low. If drillers can’t make money at $50 per barrel, supply will continue to fall, triggering a rise in prices. In short, prices must rise. 
Companies began drilling last year as oil prices hit $60 per barrel on the expectation that further prices gains were in the offing. But many drillers may not be so willing to jump back into the fray this time around, at least at first, if only because there is a lot less certainty over the solidity of the rebound. That will lead to further declines in U.S. supply, which, again, will push prices much higher than $50 per barrel.
CNBC, on the other hand, says the "new normal" for oil will settle into a range with $50 as the high end:
Christian Gattiker-Ericsson, the chief strategist and global head of research at Julius Baer bank, said the likely next step for oil prices was back downwards. 
"The new normal for oil is somewhere between $35 and $50. So depending on global activity, we will probably revisit the lower end at some stage," he told CNBC in a television interview on Monday. 
"For now it is pretty much holding up, but I think we are at the up-end of this range and we expect much more of a range-bound market. There is so much supply that will take the global economy two or three years or so to absorb," he added.
The uncertainty surrounding the plans of OPEC also continues to raise questions.  From Powersource:
Saudi Arabia has been fighting with fellow OPEC members since the oil rout started two years ago. For the first time this week, it can argue convincingly that its strategy of squeezing rival producers is succeeding. 
By stifling high-cost suppliers, the Saudi approach has now almost eradicated the global oversupply, spurring a price rally of 80 percent since January. All but one of 27 analysts surveyed by Bloomberg said the Organization of Petroleum Exporting Countries will stick with the strategy rather than set output limits when ministers gather in Vienna on June 2. 
“It might not look a victory compared with when oil was $100 a barrel, but the Saudi strategy is working as you’ve got significant production declines showing up in a lot of places, and prices are grinding higher,” said Seth Kleinman, head of energy research at Citigroup Inc. “Which makes the odds of them abandoning the plan even more remote.”
The Youngstown Vindicator reports that OPEC did not agree on a strategy for regulating price and supply at the meeting held this week:
OPEC oil ministers ended a meeting Thursday without reaching any kind of consensus on regulating the price and supply of crude, a result that triggered an immediate drop in energy markets. 
As the ministers gathered in Vienna, comments by some suggested that the oil cartel would send a message of unity on regulating the market after not being able to do so for years. 
But a statement read at the end of their meeting made no concrete pledges, emphasizing only the need for members to work for a stable market. 
The price of oil fell sharply upon the news. The U.S. benchmark was down 88 cents at $48.14 a barrel.
Most people that follow the goings-on of the oil and gas industry probably have an opinion on what will happen next, it's pretty clear from the differing viewpoints of the experts that no one really knows.

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