Oil Price Forecast 2020-2050
Oil Price Forecast 2020-2050
How Much Will Oil Prices Drop in 2020 and 2021?
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Oil drilling workers on rig in Houston, Texas
William H. Edwards / Getty Images
BY KIMBERLY AMADEO Updated April 21, 2020
Worldwide crude oil prices will average $33 a barrel for 2020 and $46/b in 2021. That is according to the Short-term Energy Outlook by the U.S. Energy Information Administration (EIA).1 The agency forecast that oil prices will average $23/b in the second quarter of 2020 but increase to $30/b in the second half of the year. These estimates have plummeted from the 2019 average of $64/b.
The COVID-19 coronavirus pandemic has reduced global oil demand. In January 2020, many governments began restricting travel and closing businesses to stem the outbreak.
A drop in demand was worsened by a supply glut. OPEC and its members had been abiding by an agreement to limit production until March 31, 2020.2 3 At the March 6, 2020, OPEC meeting, Russia announced it would no longer restrict production as of April 1. OPEC announced it would increase production in response.
As storage facilities filled, prices plummeted into negative territory. No one wanted delivery of oil, since there was hardly any place to store it. As of April 20, 2020, the prices for a barrel of oil fell to -$37.63.4 On April 12, 2020, OPEC and Russia agreed to lower output to support prices.5
Key Takeaways
Oil prices will average $23/b in the second quarter of 2020, but increase to $30/b in the second half of the year.
The average will be $33/b barrel for 2020, down from $64/b in 2019. Prices will rise to $46/b in 2021.
Demand for oil has plummeted since the onset of the coronavirus pandemic.
Brent Versus WTI
There are two grades of crude oil that are benchmarks for other oil prices. These are the West Texas Intermediate and Brent North Sea.
West Texas Intermediate comes from the United States and is the benchmark for U.S. oil prices. Brent North Sea oil comes from Northwest Europe and is the benchmark for global oil prices.
The EIA forecasts that WTI will be $29.34/b in 2020 and $41.12/b in 2021. That makes the Brent-WTI spread $3.70/b in 2020.6 The price of a barrel of WTI oil will be that much lower than Brent prices due to U.S. oversupply. In Dec. 2015, the spread was just $2/b. That was right after Congress removed the 40-year ban on U.S. oil exports.
Four Reasons for Today’s Volatile Oil Prices
Oil prices used to have a predictable seasonal swing. They spiked in the spring, as oil traders anticipated high demand for summer vacation driving. Once demand peaked, prices dropped in the fall and winter.
Oil prices have become volatile thanks to unexpected swings in the factors affecting oil prices. The coronavirus pandemic has sent demand for oil plummeting. That has offset the three other factors affecting oil prices: rising U.S. oil production, the diminished clout of OPEC, and the strengthening dollar.
1. Slowing Global Demand
The EIA reported that global oil demand was 11.4 million b/d lower in March 2020 than the 2019 annual average.7 It forecast demand to be 17.1 million b/d lower in April. For the year, the EIA estimates demand will be 95.5 million b/d, 5.2% lower than in 2019. That would be the largest drop since the EIA began keeping records.
This forecast could be revised substantially downward depending on how much the pandemic reduces demand.
2. Rising U.S. Oil Production
U.S. producers of shale oil and alternative fuels, such as ethanol, increased supply. They increased supply slowly, supporting prices high enough to pay for exploration costs. Many shale oil producers became more efficient at extracting oil. They found ways to keep wells open, saving them the cost of capping them. This ramp-up began in 2015 and has affected supply ever since.
In August 2018, the United States became the world’s largest oil producer.8 In September 2019, U.S. oil production increased to a (at that time) record 12.1 million barrels a day.9 It was the first time since 1973 that the United States exported more oil than it imported.
3. Diminished OPEC Clout
U.S. shale producers have become more influential, but they don’t operate as a cartel as OPEC does. To maintain market share, OPEC has not cut output enough to put a floor under prices.
OPEC’s leader, Saudi Arabia, wants higher oil prices because that’s the source of its government revenue. But it must balance that with losing market share to U.S. and Russian companies.
The conflict between the Sunni and Shiite branches of Islam has also compromised OPEC's power.
Sunni-led Saudi Arabia also doesn’t want to lose market share to its arch-rival, Shiite-led Iran. The 2015 nuclear peace treaty lifted 2010 economic sanctions and allowed Saudi Arabia's biggest rival to export oil again in 2016. But that source dried up when President Donald Trump reimposed sanctions in 2018.
4. Rising Dollar Value
Foreign exchange traders have been driving up the value of the dollar since 2014.10
Many traders use the dollar as a safe have investment during times of economic uncertainty.
For example, the dollar’s value rose by 25% between 2013 and 2016 in response to the Greek debt crisis and Brexit. In the 10 days between March 3 and March 23, it rose 8.5% in response to the coronavirus pandemic.
All oil transactions are paid in U.S. dollars. Most oil-exporting countries peg their currencies to the dollar. As a result, a 25% rise in the dollar offsets a 25% drop in oil prices. Global economic uncertainty keeps the U.S. dollar strong.
Oil Price Forecast 2025 and 2050
Note: This forecast was done early in the coronavirus pandemic. The EIA forecasts that, by 2025, a barrel of Brent crude oil's average price will rise to $79/b. This figure is in 2019 dollars, which removes the effect of inflation.11
By 2030, world demand will drive oil prices to $98/b. By 2040, prices will be $146/b, again quoted in 2019 dollars. By then, the cheap oil sources will have been exhausted, making it more expensive to extract oil. By 2050, oil prices will be $214/b, according to Table 1 of the EIA's Annual Energy Outlook.
The EIA assumes that demand for petroleum flattens out as utilities rely more on natural gas and renewable energy. It also assumes the economy grows around 2% annually on average, while energy consumption increases by 0.4% a year. The EIA also has predictions for other possible scenarios.
Oil at $200 a Barrel?
Although it seems ludicrous now, there are situations that could create oil at $200 a barrel. The EIA forecast oil prices of $214/ b in 2050 if the cost to produce oil drops and it crowds out competing energy sources.11
In 2008, oil prices reached a record high of $127/b.12 They dropped to $36.84/b before rising to $104.06/b in 2013. That's when the Organization for Economic Cooperation and Development forecast that the price of Brent oil could go as high as $270/b.13 It based its prediction on skyrocketing demand from China and other emerging markets.
Would $200/b of oil be such a bad thing? Using oil as an energy source has caused climate change.
Carbon taxes have been dismissed as a way to stop climate change. Critics say it would raise oil prices too high, imposing a regressive tax on the poor.
The OECD said that high oil prices result in "demand destruction." If high prices last long enough, people change their buying habits. Demand destruction occurred after the 1979 oil shock. Oil prices steadily deteriorated for about six years. They finally collapsed when demand declined, and supply caught up.
The idea of oil at $200/b seems catastrophic to the American way of life. But people in the European Union were paying the equivalent of about $250/b for years due to high taxes. That didn't stop the EU from being one of the world's largest oil consumers. As long as people have time to adjust, they will find ways to live with higher oil prices.
ARTICLE TABLE OF CONTENTS
Skip to section
Brent Versus WTI
Reasons for Today’s Volatile Oil Prices
Oil Price Forecast 2025 and 2050
Oil at $200 a Barrel?
Article Sources
How negative oil prices could set the stage for the next price boom
By Matt Egan, CNN Business
Updated 1441 GMT (2241 HKT) April 23, 2020
amin nasser aramco_00003104.jpg
Saudi Aramco CEO on oil prices, US shale and Hormuz security
What is carbon capture?
natural gas energy gec_00010408.jpg
Why natural gas has a role in the energy transition
This energy startup has made a solar breakthrough
Pioneer CEO: Flaring is the biggest issue in the Permian Basin
378796 09: A pipeline carries oil September 20, 2000 at the Federal Strategic Petroleum Reserve facility known as Big Hill near Beaumont, Texas. It is one of four crude oil storage sites run by the U.S. government that could be tapped to ease the oil crisis. The Big Hill facility has 14 underground solution-mined storage caverns that have a combined storage capacity of 160 million barrels. The site has demonstrated the capability to deliver crude at 930,000 barrels per day. The Big Hill site is connected via a 25-mile, 36-inch pipeline to the Sun Marine Terminal and the Unocal Marine Terminal at Nederland, Texas. The pipeline also interconnects with the Texaco 20-inch pipeline system in Port Arthur, Texas. The reserve, created in 1975 after the Arab oil embargo, is intended to provide a stopgap in case of disruptions in oil imports. It has been used only once, during the Gulf War in 1991. (Photo by Joe Raedle/Newsmakers)
Why the US has a huge stash of emergency oil
An oil tanker is on fire in the sea of Oman, Thursday, June 13, 2019. Two oil tankers near the strategic Strait of Hormuz were reportedly attacked on Thursday, an assault that left one ablaze and adrift as sailors were evacuated from both vessels and the U.S. Navy rushed to assist amid heightened tensions between Washington and Tehran. (AP Photo/ISNA)
Why the Strait of Hormuz is so important for oil
Flames are seen at the production facility of Saudi Aramco's Shaybah oilfield in the Empty Quarter, Saudi Arabian on May 22, 2018.
Does OPEC really control oil prices?
Oil prices went negative. Here's why
Pump jacks draw crude oil from the Long Beach Oil Field near homes in Signal Hill, California, on March 9, 2020. - Global stocks and oil prices rebounded on March 10, 2020 on hopes of US economic stimulus efforts as the coronavirus rages, one day after suffering their biggest losses in more than a decade. Trading is exceptionally volatile as investors attempt to get a grip on a rapidly changing news flow, with positive reports of progress in China on the virus clashing with a Saudi decision to increase oil output in an already over-supplied market. (Photo by David McNew/AFP/Getty Images)
US oil prices fall below zero for the first time ever
The sun sets behind an idle pump jack near Karnes City, Texas, Wednesday, April 8, 2020. Demand for oil continues to fall due to the new coronavirus outbreak. (AP Photo/Eric Gay)
Global oil crisis: Bottom of the barrel is still unclear
A partial view of Saudi Aramco's Abqaiq oil processing plant on September 20, 2019. - Saudi Arabia said on September 17 its oil output will return to normal by the end of September, seeking to soothe rattled energy markets after attacks on two instillations that slashed its production by half. The strikes on Abqaiq - the world's largest oil processing facility - and the Khurais oil field in eastern Saudi Arabia roiled energy markets and revived fears of a conflict in the tinderbox Gulf region. (Photo by Fayez Nureldine / AFP) (Photo credit should read FAYEZ NURELDINE/AFP/Getty Images)
OPEC+ agrees on record cut to oil production
Oil storage tanks stand at the RN-Tuapsinsky refinery, operated by Rosneft Oil Co., in Tuapse, Russia, on Monday, March 23, 2020. Major oil currencies have fallen much more this month following the plunge in Brent crude prices to less than $30 a barrel, with Russias ruble down by 15%. Photographer: Andrey Rudakov/Bloomberg via Getty Images
Oil producers grapple with demand collapse
An oil pumpjack works at dawn in the Permian Basin oil field on January 20, 2016 in the oil town of Andrews, Texas.
Oil prices rally on talk of supply cut
Pump jacks draw crude oil from the Long Beach Oil Field near homes in Signal Hill, California, on March 9, 2020. - Global stocks and oil prices rebounded on March 10, 2020 on hopes of US economic stimulus efforts as the coronavirus rages, one day after suffering their biggest losses in more than a decade. Trading is exceptionally volatile as investors attempt to get a grip on a rapidly changing news flow, with positive reports of progress in China on the virus clashing with a Saudi decision to increase oil output in an already over-supplied market. (Photo by David McNew/AFP/Getty Images)
Oil prices plunge on coronavirus fears
Oil rig pumpjacks, also known as thirsty birds, extract crude from the Wilmington Field oil deposits area where Tidelands Oil Production Company operates near Long Beach, California July 30, 2013. REUTERS/David McNew (UNITED STATES - Tags: ENERGY BUSINESS)
Why oil prices are slumping
amin nasser aramco_00003104.jpg
Saudi Aramco CEO on oil prices, US shale and Hormuz security
What is carbon capture?
natural gas energy gec_00010408.jpg
Why natural gas has a role in the energy transition
This energy startup has made a solar breakthrough
Pioneer CEO: Flaring is the biggest issue in the Permian Basin
378796 09: A pipeline carries oil September 20, 2000 at the Federal Strategic Petroleum Reserve facility known as Big Hill near Beaumont, Texas. It is one of four crude oil storage sites run by the U.S. government that could be tapped to ease the oil crisis. The Big Hill facility has 14 underground solution-mined storage caverns that have a combined storage capacity of 160 million barrels. The site has demonstrated the capability to deliver crude at 930,000 barrels per day. The Big Hill site is connected via a 25-mile, 36-inch pipeline to the Sun Marine Terminal and the Unocal Marine Terminal at Nederland, Texas. The pipeline also interconnects with the Texaco 20-inch pipeline system in Port Arthur, Texas. The reserve, created in 1975 after the Arab oil embargo, is intended to provide a stopgap in case of disruptions in oil imports. It has been used only once, during the Gulf War in 1991. (Photo by Joe Raedle/Newsmakers)
Why the US has a huge stash of emergency oil
An oil tanker is on fire in the sea of Oman, Thursday, June 13, 2019. Two oil tankers near the strategic Strait of Hormuz were reportedly attacked on Thursday, an assault that left one ablaze and adrift as sailors were evacuated from both vessels and the U.S. Navy rushed to assist amid heightened tensions between Washington and Tehran. (AP Photo/ISNA)
Why the Strait of Hormuz is so important for oil
Flames are seen at the production facility of Saudi Aramco's Shaybah oilfield in the Empty Quarter, Saudi Arabian on May 22, 2018.
Does OPEC really control oil prices?
Oil prices went negative. Here's why
Pump jacks draw crude oil from the Long Beach Oil Field near homes in Signal Hill, California, on March 9, 2020. - Global stocks and oil prices rebounded on March 10, 2020 on hopes of US economic stimulus efforts as the coronavirus rages, one day after suffering their biggest losses in more than a decade. Trading is exceptionally volatile as investors attempt to get a grip on a rapidly changing news flow, with positive reports of progress in China on the virus clashing with a Saudi decision to increase oil output in an already over-supplied market. (Photo by David McNew/AFP/Getty Images)
US oil prices fall below zero for the first time ever
The sun sets behind an idle pump jack near Karnes City, Texas, Wednesday, April 8, 2020. Demand for oil continues to fall due to the new coronavirus outbreak. (AP Photo/Eric Gay)
Global oil crisis: Bottom of the barrel is still unclear
A partial view of Saudi Aramco's Abqaiq oil processing plant on September 20, 2019. - Saudi Arabia said on September 17 its oil output will return to normal by the end of September, seeking to soothe rattled energy markets after attacks on two instillations that slashed its production by half. The strikes on Abqaiq - the world's largest oil processing facility - and the Khurais oil field in eastern Saudi Arabia roiled energy markets and revived fears of a conflict in the tinderbox Gulf region. (Photo by Fayez Nureldine / AFP) (Photo credit should read FAYEZ NURELDINE/AFP/Getty Images)
OPEC+ agrees on record cut to oil production
Oil storage tanks stand at the RN-Tuapsinsky refinery, operated by Rosneft Oil Co., in Tuapse, Russia, on Monday, March 23, 2020. Major oil currencies have fallen much more this month following the plunge in Brent crude prices to less than $30 a barrel, with Russias ruble down by 15%. Photographer: Andrey Rudakov/Bloomberg via Getty Images
Oil producers grapple with demand collapse
An oil pumpjack works at dawn in the Permian Basin oil field on January 20, 2016 in the oil town of Andrews, Texas.
Oil prices rally on talk of supply cut
Pump jacks draw crude oil from the Long Beach Oil Field near homes in Signal Hill, California, on March 9, 2020. - Global stocks and oil prices rebounded on March 10, 2020 on hopes of US economic stimulus efforts as the coronavirus rages, one day after suffering their biggest losses in more than a decade. Trading is exceptionally volatile as investors attempt to get a grip on a rapidly changing news flow, with positive reports of progress in China on the virus clashing with a Saudi decision to increase oil output in an already over-supplied market. (Photo by David McNew/AFP/Getty Images)
Oil prices plunge on coronavirus fears
Oil rig pumpjacks, also known as thirsty birds, extract crude from the Wilmington Field oil deposits area where Tidelands Oil Production Company operates near Long Beach, California July 30, 2013. REUTERS/David McNew (UNITED STATES - Tags: ENERGY BUSINESS)
Why oil prices are slumping
New York (CNN Business)The boom-to-bust oil market is experiencing one of its darkest moments in history.
Oil demand is collapsing because of the coronavirus crisis. Supply is shrinking -- but not nearly fast enough.
The world is literally running out of room to store unneeded barrels of oil piling up during the coronavirus pandemic. That storage problem is so dire that it caused oil prices to turn negative this week for the first time ever.
Trump promises to rescue oil companies after prices go negative
Trump promises to rescue oil companies after prices go negative
The crash is forcing a reckoning in the oil industry -- a painful one. Many shale oil producers have canceled drilling plans. Others have been forced to shut down active wells. Some frackers won't survive at all.
But the violent rebalancing in the oil market might be so overdone that it will set the stage for a spike in prices. When and if demand recovers, there might not be enough supply to meet it.
"We are in an epic bust. As hard as it may be to believe, the next step is a boom," said Pavel Molchanov, energy analyst at Raymond James.
Some 3.6 billion people are living under lockdowns around the world, Molchanov estimates. Passenger flights have been grounded. Many factories are dark. World oil demand is expected to plunge by a record 9.3 million barrels per day in 2020, according to the International Energy Agency.
But that won't last forever. At some point, the world will thirst for oil again.
"When demand returns to something close to normal levels, it's quite possible there will be a shortage situation in 2021," Molchanov said.
Subzero oil prices
OPEC, Russia and a group of other oil-producing countries have already agreed to slash production by a record-setting 10 million barrels beginning in May. Market forces are causing non-OPEC producers, led by the United States, to similarly cut output.
The shocking collapse in US oil to $-40 added an exclamation point to the problem facing the industry. Oil futures require that holders of a contract take delivery of barrels when the contract expires. But no one wanted to get crude delivered to them in May when storage capacity may run out. Even if it doesn't run out, storage costs have skyrocketed.
"Holders of May contracts were effectively willing to pay someone to get them out of their long positions...to avoid being physically delivered crude oil next month," Goldman Sachs analyst Damien Courvalin wrote in a note to clients Monday.
Mizuho analyst Paul Sankey said Tuesday US oil futures could "quite possibly" crash to $-100 in May.
"The physical reality of oil is that it is difficult to handle, volatile, potentially polluting and actually useless without a refinery," Sankey wrote in a report to clients. "If you had a stinking barrel of oil in your back yard, would you pay someone $100/barrel to take it away? Yes, and you would probably be relieved you were not charged $300."
Record collapse for US shale
Against that backdrop, oil supply clearly must come down at a breathtaking pace.
US fracking is on track to suffer its biggest monthly decline in history, according to Rystad Energy. The total number of started fracking operations will plunge by 60% in April from the peak earlier this year.
"With ultimately a finite amount of storage left to fill, production will soon need to fall sizably to bring the market into balance," Goldman's Courvalin wrote, "finally setting the stage for higher prices once demand gradually recovers."
How high? Molchanov said oil could trade hit $50 to $60 next year and "potentially higher than that." Goldman Sachs has previously predicted oil could climb "far above" $55 in 2021.
"This inflection will play out in a matter of weeks, not months, with the market likely forced into balance before June," Courvalin wrote.
Companies are cutting production in two ways. First, they are slashing their spending plans for drilling new and uncompleted wells. For instance, ExxonMobil (XOM) cut its 2020 spending by 30%, including a large focus on the Permian Basin shale oilfield in West Texas.
Secondly, and most importantly, oil companies are turning the taps off on active wells through a painful process known as "shut-ins." And there is no guarantee those taps can or will get turned back on at full capacity.
"It will take time and money to turn it back on. It's not like a light switch," David Trainer, CEO of New Constructs, an investment research firm based in Nashville.
Bankruptcies are on the way
Some have argued that shale oil wells will be damaged during forced shut-ins, making it trickier to turn them back on. That could limit the ability of US shale companies to respond to higher demand.
"That is a wildcard," said Jeff Wyll, senior energy analyst at Neuberger Berman. "Fracking is a new phenomenon in the oil market. There's just less data available."
And some companies may not be around to turn the taps back on.
In a $20 oil environment, 533 US oil exploration and production companies will file for bankruptcy by the end of 2021, according to Rystad Energy. Even in a $30 environment, more than 200 US producers will go bankrupt, Rystad said.
Rather than get restructured in Chapter 11 proceedings, some of these companies may be unable to get financing to stay alive. They will be forced to liquidate altogether.
"When demand comes back online, there won't be as many people there to make the oil," said Trainer.
Some companies that do survive and have undamaged wells may be hesitant to aggressively ramp production back up.
"It's not like the oil companies will be rushing to turn supply back on so they can just end up in the same situation. They will wait to be sure," Trainer said.
What if demand doesn't return?
But this bullish thesis hinges on a sharp recovery in demand back near the 100 million barrels per day the world was consuming before the crisis. And that is no sure thing.
There is a real risk of a more drawn-out recession that limits oil demand in the United States and around the world for a prolonged period. In that scenario, prices could stay low.
One of the big concerns is that a second wave of coronavirus infections strikes during the second half of 2020, hindering any recovery. The director of the Centers for Disease Control and Protection warned Tuesday in an interview with the Washington Post that a second wave will be more disastrous because it would likely coincide with the start of flu season.
That could force a return to the social-distancing and stay-at-home orders that crippled the oil market in the first place.
Oil prices turned negative. Hundreds of US oil companies could go bankrupt
Oil prices turned negative. Hundreds of US oil companies could go bankrupt
"One of the biggest risks for the oil market is a false restart of the economy," said Neuberger's Wyll.
No one knows for sure how the demand picture will look. Much of that will be determined by the trajectory of the pandemic and the willingness of people to return to pre-crisis activities like road trips, cruises and flights.
Trainer, the New Constructs CEO, is betting they will.
"We're social creatures. We're going to want to get back to normal," he said. "There's a significant amount of the population that will party like it's 1999. They're sitting at home bored out of their minds."
How Much Will Oil Prices Drop in 2020 and 2021?
Share
Pin
Oil drilling workers on rig in Houston, Texas
William H. Edwards / Getty Images
BY KIMBERLY AMADEO Updated April 21, 2020
Worldwide crude oil prices will average $33 a barrel for 2020 and $46/b in 2021. That is according to the Short-term Energy Outlook by the U.S. Energy Information Administration (EIA).1 The agency forecast that oil prices will average $23/b in the second quarter of 2020 but increase to $30/b in the second half of the year. These estimates have plummeted from the 2019 average of $64/b.
The COVID-19 coronavirus pandemic has reduced global oil demand. In January 2020, many governments began restricting travel and closing businesses to stem the outbreak.
A drop in demand was worsened by a supply glut. OPEC and its members had been abiding by an agreement to limit production until March 31, 2020.2 3 At the March 6, 2020, OPEC meeting, Russia announced it would no longer restrict production as of April 1. OPEC announced it would increase production in response.
As storage facilities filled, prices plummeted into negative territory. No one wanted delivery of oil, since there was hardly any place to store it. As of April 20, 2020, the prices for a barrel of oil fell to -$37.63.4 On April 12, 2020, OPEC and Russia agreed to lower output to support prices.5
Key Takeaways
Oil prices will average $23/b in the second quarter of 2020, but increase to $30/b in the second half of the year.
The average will be $33/b barrel for 2020, down from $64/b in 2019. Prices will rise to $46/b in 2021.
Demand for oil has plummeted since the onset of the coronavirus pandemic.
Brent Versus WTI
There are two grades of crude oil that are benchmarks for other oil prices. These are the West Texas Intermediate and Brent North Sea.
West Texas Intermediate comes from the United States and is the benchmark for U.S. oil prices. Brent North Sea oil comes from Northwest Europe and is the benchmark for global oil prices.
The EIA forecasts that WTI will be $29.34/b in 2020 and $41.12/b in 2021. That makes the Brent-WTI spread $3.70/b in 2020.6 The price of a barrel of WTI oil will be that much lower than Brent prices due to U.S. oversupply. In Dec. 2015, the spread was just $2/b. That was right after Congress removed the 40-year ban on U.S. oil exports.
Four Reasons for Today’s Volatile Oil Prices
Oil prices used to have a predictable seasonal swing. They spiked in the spring, as oil traders anticipated high demand for summer vacation driving. Once demand peaked, prices dropped in the fall and winter.
Oil prices have become volatile thanks to unexpected swings in the factors affecting oil prices. The coronavirus pandemic has sent demand for oil plummeting. That has offset the three other factors affecting oil prices: rising U.S. oil production, the diminished clout of OPEC, and the strengthening dollar.
1. Slowing Global Demand
The EIA reported that global oil demand was 11.4 million b/d lower in March 2020 than the 2019 annual average.7 It forecast demand to be 17.1 million b/d lower in April. For the year, the EIA estimates demand will be 95.5 million b/d, 5.2% lower than in 2019. That would be the largest drop since the EIA began keeping records.
This forecast could be revised substantially downward depending on how much the pandemic reduces demand.
2. Rising U.S. Oil Production
U.S. producers of shale oil and alternative fuels, such as ethanol, increased supply. They increased supply slowly, supporting prices high enough to pay for exploration costs. Many shale oil producers became more efficient at extracting oil. They found ways to keep wells open, saving them the cost of capping them. This ramp-up began in 2015 and has affected supply ever since.
In August 2018, the United States became the world’s largest oil producer.8 In September 2019, U.S. oil production increased to a (at that time) record 12.1 million barrels a day.9 It was the first time since 1973 that the United States exported more oil than it imported.
3. Diminished OPEC Clout
U.S. shale producers have become more influential, but they don’t operate as a cartel as OPEC does. To maintain market share, OPEC has not cut output enough to put a floor under prices.
OPEC’s leader, Saudi Arabia, wants higher oil prices because that’s the source of its government revenue. But it must balance that with losing market share to U.S. and Russian companies.
The conflict between the Sunni and Shiite branches of Islam has also compromised OPEC's power.
Sunni-led Saudi Arabia also doesn’t want to lose market share to its arch-rival, Shiite-led Iran. The 2015 nuclear peace treaty lifted 2010 economic sanctions and allowed Saudi Arabia's biggest rival to export oil again in 2016. But that source dried up when President Donald Trump reimposed sanctions in 2018.
4. Rising Dollar Value
Foreign exchange traders have been driving up the value of the dollar since 2014.10
Many traders use the dollar as a safe have investment during times of economic uncertainty.
For example, the dollar’s value rose by 25% between 2013 and 2016 in response to the Greek debt crisis and Brexit. In the 10 days between March 3 and March 23, it rose 8.5% in response to the coronavirus pandemic.
All oil transactions are paid in U.S. dollars. Most oil-exporting countries peg their currencies to the dollar. As a result, a 25% rise in the dollar offsets a 25% drop in oil prices. Global economic uncertainty keeps the U.S. dollar strong.
Oil Price Forecast 2025 and 2050
Note: This forecast was done early in the coronavirus pandemic. The EIA forecasts that, by 2025, a barrel of Brent crude oil's average price will rise to $79/b. This figure is in 2019 dollars, which removes the effect of inflation.11
By 2030, world demand will drive oil prices to $98/b. By 2040, prices will be $146/b, again quoted in 2019 dollars. By then, the cheap oil sources will have been exhausted, making it more expensive to extract oil. By 2050, oil prices will be $214/b, according to Table 1 of the EIA's Annual Energy Outlook.
The EIA assumes that demand for petroleum flattens out as utilities rely more on natural gas and renewable energy. It also assumes the economy grows around 2% annually on average, while energy consumption increases by 0.4% a year. The EIA also has predictions for other possible scenarios.
Oil at $200 a Barrel?
Although it seems ludicrous now, there are situations that could create oil at $200 a barrel. The EIA forecast oil prices of $214/ b in 2050 if the cost to produce oil drops and it crowds out competing energy sources.11
In 2008, oil prices reached a record high of $127/b.12 They dropped to $36.84/b before rising to $104.06/b in 2013. That's when the Organization for Economic Cooperation and Development forecast that the price of Brent oil could go as high as $270/b.13 It based its prediction on skyrocketing demand from China and other emerging markets.
Would $200/b of oil be such a bad thing? Using oil as an energy source has caused climate change.
Carbon taxes have been dismissed as a way to stop climate change. Critics say it would raise oil prices too high, imposing a regressive tax on the poor.
The OECD said that high oil prices result in "demand destruction." If high prices last long enough, people change their buying habits. Demand destruction occurred after the 1979 oil shock. Oil prices steadily deteriorated for about six years. They finally collapsed when demand declined, and supply caught up.
The idea of oil at $200/b seems catastrophic to the American way of life. But people in the European Union were paying the equivalent of about $250/b for years due to high taxes. That didn't stop the EU from being one of the world's largest oil consumers. As long as people have time to adjust, they will find ways to live with higher oil prices.
ARTICLE TABLE OF CONTENTS
Skip to section
Brent Versus WTI
Reasons for Today’s Volatile Oil Prices
Oil Price Forecast 2025 and 2050
Oil at $200 a Barrel?
Article Sources
How negative oil prices could set the stage for the next price boom
By Matt Egan, CNN Business
Updated 1441 GMT (2241 HKT) April 23, 2020
amin nasser aramco_00003104.jpg
Saudi Aramco CEO on oil prices, US shale and Hormuz security
What is carbon capture?
natural gas energy gec_00010408.jpg
Why natural gas has a role in the energy transition
This energy startup has made a solar breakthrough
Pioneer CEO: Flaring is the biggest issue in the Permian Basin
378796 09: A pipeline carries oil September 20, 2000 at the Federal Strategic Petroleum Reserve facility known as Big Hill near Beaumont, Texas. It is one of four crude oil storage sites run by the U.S. government that could be tapped to ease the oil crisis. The Big Hill facility has 14 underground solution-mined storage caverns that have a combined storage capacity of 160 million barrels. The site has demonstrated the capability to deliver crude at 930,000 barrels per day. The Big Hill site is connected via a 25-mile, 36-inch pipeline to the Sun Marine Terminal and the Unocal Marine Terminal at Nederland, Texas. The pipeline also interconnects with the Texaco 20-inch pipeline system in Port Arthur, Texas. The reserve, created in 1975 after the Arab oil embargo, is intended to provide a stopgap in case of disruptions in oil imports. It has been used only once, during the Gulf War in 1991. (Photo by Joe Raedle/Newsmakers)
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An oil tanker is on fire in the sea of Oman, Thursday, June 13, 2019. Two oil tankers near the strategic Strait of Hormuz were reportedly attacked on Thursday, an assault that left one ablaze and adrift as sailors were evacuated from both vessels and the U.S. Navy rushed to assist amid heightened tensions between Washington and Tehran. (AP Photo/ISNA)
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Pump jacks draw crude oil from the Long Beach Oil Field near homes in Signal Hill, California, on March 9, 2020. - Global stocks and oil prices rebounded on March 10, 2020 on hopes of US economic stimulus efforts as the coronavirus rages, one day after suffering their biggest losses in more than a decade. Trading is exceptionally volatile as investors attempt to get a grip on a rapidly changing news flow, with positive reports of progress in China on the virus clashing with a Saudi decision to increase oil output in an already over-supplied market. (Photo by David McNew/AFP/Getty Images)
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A partial view of Saudi Aramco's Abqaiq oil processing plant on September 20, 2019. - Saudi Arabia said on September 17 its oil output will return to normal by the end of September, seeking to soothe rattled energy markets after attacks on two instillations that slashed its production by half. The strikes on Abqaiq - the world's largest oil processing facility - and the Khurais oil field in eastern Saudi Arabia roiled energy markets and revived fears of a conflict in the tinderbox Gulf region. (Photo by Fayez Nureldine / AFP) (Photo credit should read FAYEZ NURELDINE/AFP/Getty Images)
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Oil storage tanks stand at the RN-Tuapsinsky refinery, operated by Rosneft Oil Co., in Tuapse, Russia, on Monday, March 23, 2020. Major oil currencies have fallen much more this month following the plunge in Brent crude prices to less than $30 a barrel, with Russias ruble down by 15%. Photographer: Andrey Rudakov/Bloomberg via Getty Images
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Pump jacks draw crude oil from the Long Beach Oil Field near homes in Signal Hill, California, on March 9, 2020. - Global stocks and oil prices rebounded on March 10, 2020 on hopes of US economic stimulus efforts as the coronavirus rages, one day after suffering their biggest losses in more than a decade. Trading is exceptionally volatile as investors attempt to get a grip on a rapidly changing news flow, with positive reports of progress in China on the virus clashing with a Saudi decision to increase oil output in an already over-supplied market. (Photo by David McNew/AFP/Getty Images)
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Oil rig pumpjacks, also known as thirsty birds, extract crude from the Wilmington Field oil deposits area where Tidelands Oil Production Company operates near Long Beach, California July 30, 2013. REUTERS/David McNew (UNITED STATES - Tags: ENERGY BUSINESS)
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378796 09: A pipeline carries oil September 20, 2000 at the Federal Strategic Petroleum Reserve facility known as Big Hill near Beaumont, Texas. It is one of four crude oil storage sites run by the U.S. government that could be tapped to ease the oil crisis. The Big Hill facility has 14 underground solution-mined storage caverns that have a combined storage capacity of 160 million barrels. The site has demonstrated the capability to deliver crude at 930,000 barrels per day. The Big Hill site is connected via a 25-mile, 36-inch pipeline to the Sun Marine Terminal and the Unocal Marine Terminal at Nederland, Texas. The pipeline also interconnects with the Texaco 20-inch pipeline system in Port Arthur, Texas. The reserve, created in 1975 after the Arab oil embargo, is intended to provide a stopgap in case of disruptions in oil imports. It has been used only once, during the Gulf War in 1991. (Photo by Joe Raedle/Newsmakers)
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An oil tanker is on fire in the sea of Oman, Thursday, June 13, 2019. Two oil tankers near the strategic Strait of Hormuz were reportedly attacked on Thursday, an assault that left one ablaze and adrift as sailors were evacuated from both vessels and the U.S. Navy rushed to assist amid heightened tensions between Washington and Tehran. (AP Photo/ISNA)
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Flames are seen at the production facility of Saudi Aramco's Shaybah oilfield in the Empty Quarter, Saudi Arabian on May 22, 2018.
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Pump jacks draw crude oil from the Long Beach Oil Field near homes in Signal Hill, California, on March 9, 2020. - Global stocks and oil prices rebounded on March 10, 2020 on hopes of US economic stimulus efforts as the coronavirus rages, one day after suffering their biggest losses in more than a decade. Trading is exceptionally volatile as investors attempt to get a grip on a rapidly changing news flow, with positive reports of progress in China on the virus clashing with a Saudi decision to increase oil output in an already over-supplied market. (Photo by David McNew/AFP/Getty Images)
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The sun sets behind an idle pump jack near Karnes City, Texas, Wednesday, April 8, 2020. Demand for oil continues to fall due to the new coronavirus outbreak. (AP Photo/Eric Gay)
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A partial view of Saudi Aramco's Abqaiq oil processing plant on September 20, 2019. - Saudi Arabia said on September 17 its oil output will return to normal by the end of September, seeking to soothe rattled energy markets after attacks on two instillations that slashed its production by half. The strikes on Abqaiq - the world's largest oil processing facility - and the Khurais oil field in eastern Saudi Arabia roiled energy markets and revived fears of a conflict in the tinderbox Gulf region. (Photo by Fayez Nureldine / AFP) (Photo credit should read FAYEZ NURELDINE/AFP/Getty Images)
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Oil storage tanks stand at the RN-Tuapsinsky refinery, operated by Rosneft Oil Co., in Tuapse, Russia, on Monday, March 23, 2020. Major oil currencies have fallen much more this month following the plunge in Brent crude prices to less than $30 a barrel, with Russias ruble down by 15%. Photographer: Andrey Rudakov/Bloomberg via Getty Images
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An oil pumpjack works at dawn in the Permian Basin oil field on January 20, 2016 in the oil town of Andrews, Texas.
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Pump jacks draw crude oil from the Long Beach Oil Field near homes in Signal Hill, California, on March 9, 2020. - Global stocks and oil prices rebounded on March 10, 2020 on hopes of US economic stimulus efforts as the coronavirus rages, one day after suffering their biggest losses in more than a decade. Trading is exceptionally volatile as investors attempt to get a grip on a rapidly changing news flow, with positive reports of progress in China on the virus clashing with a Saudi decision to increase oil output in an already over-supplied market. (Photo by David McNew/AFP/Getty Images)
Oil prices plunge on coronavirus fears
Oil rig pumpjacks, also known as thirsty birds, extract crude from the Wilmington Field oil deposits area where Tidelands Oil Production Company operates near Long Beach, California July 30, 2013. REUTERS/David McNew (UNITED STATES - Tags: ENERGY BUSINESS)
Why oil prices are slumping
New York (CNN Business)The boom-to-bust oil market is experiencing one of its darkest moments in history.
Oil demand is collapsing because of the coronavirus crisis. Supply is shrinking -- but not nearly fast enough.
The world is literally running out of room to store unneeded barrels of oil piling up during the coronavirus pandemic. That storage problem is so dire that it caused oil prices to turn negative this week for the first time ever.
Trump promises to rescue oil companies after prices go negative
Trump promises to rescue oil companies after prices go negative
The crash is forcing a reckoning in the oil industry -- a painful one. Many shale oil producers have canceled drilling plans. Others have been forced to shut down active wells. Some frackers won't survive at all.
But the violent rebalancing in the oil market might be so overdone that it will set the stage for a spike in prices. When and if demand recovers, there might not be enough supply to meet it.
"We are in an epic bust. As hard as it may be to believe, the next step is a boom," said Pavel Molchanov, energy analyst at Raymond James.
Some 3.6 billion people are living under lockdowns around the world, Molchanov estimates. Passenger flights have been grounded. Many factories are dark. World oil demand is expected to plunge by a record 9.3 million barrels per day in 2020, according to the International Energy Agency.
But that won't last forever. At some point, the world will thirst for oil again.
"When demand returns to something close to normal levels, it's quite possible there will be a shortage situation in 2021," Molchanov said.
Subzero oil prices
OPEC, Russia and a group of other oil-producing countries have already agreed to slash production by a record-setting 10 million barrels beginning in May. Market forces are causing non-OPEC producers, led by the United States, to similarly cut output.
The shocking collapse in US oil to $-40 added an exclamation point to the problem facing the industry. Oil futures require that holders of a contract take delivery of barrels when the contract expires. But no one wanted to get crude delivered to them in May when storage capacity may run out. Even if it doesn't run out, storage costs have skyrocketed.
"Holders of May contracts were effectively willing to pay someone to get them out of their long positions...to avoid being physically delivered crude oil next month," Goldman Sachs analyst Damien Courvalin wrote in a note to clients Monday.
Mizuho analyst Paul Sankey said Tuesday US oil futures could "quite possibly" crash to $-100 in May.
"The physical reality of oil is that it is difficult to handle, volatile, potentially polluting and actually useless without a refinery," Sankey wrote in a report to clients. "If you had a stinking barrel of oil in your back yard, would you pay someone $100/barrel to take it away? Yes, and you would probably be relieved you were not charged $300."
Record collapse for US shale
Against that backdrop, oil supply clearly must come down at a breathtaking pace.
US fracking is on track to suffer its biggest monthly decline in history, according to Rystad Energy. The total number of started fracking operations will plunge by 60% in April from the peak earlier this year.
"With ultimately a finite amount of storage left to fill, production will soon need to fall sizably to bring the market into balance," Goldman's Courvalin wrote, "finally setting the stage for higher prices once demand gradually recovers."
How high? Molchanov said oil could trade hit $50 to $60 next year and "potentially higher than that." Goldman Sachs has previously predicted oil could climb "far above" $55 in 2021.
"This inflection will play out in a matter of weeks, not months, with the market likely forced into balance before June," Courvalin wrote.
Companies are cutting production in two ways. First, they are slashing their spending plans for drilling new and uncompleted wells. For instance, ExxonMobil (XOM) cut its 2020 spending by 30%, including a large focus on the Permian Basin shale oilfield in West Texas.
Secondly, and most importantly, oil companies are turning the taps off on active wells through a painful process known as "shut-ins." And there is no guarantee those taps can or will get turned back on at full capacity.
"It will take time and money to turn it back on. It's not like a light switch," David Trainer, CEO of New Constructs, an investment research firm based in Nashville.
Bankruptcies are on the way
Some have argued that shale oil wells will be damaged during forced shut-ins, making it trickier to turn them back on. That could limit the ability of US shale companies to respond to higher demand.
"That is a wildcard," said Jeff Wyll, senior energy analyst at Neuberger Berman. "Fracking is a new phenomenon in the oil market. There's just less data available."
And some companies may not be around to turn the taps back on.
In a $20 oil environment, 533 US oil exploration and production companies will file for bankruptcy by the end of 2021, according to Rystad Energy. Even in a $30 environment, more than 200 US producers will go bankrupt, Rystad said.
Rather than get restructured in Chapter 11 proceedings, some of these companies may be unable to get financing to stay alive. They will be forced to liquidate altogether.
"When demand comes back online, there won't be as many people there to make the oil," said Trainer.
Some companies that do survive and have undamaged wells may be hesitant to aggressively ramp production back up.
"It's not like the oil companies will be rushing to turn supply back on so they can just end up in the same situation. They will wait to be sure," Trainer said.
What if demand doesn't return?
But this bullish thesis hinges on a sharp recovery in demand back near the 100 million barrels per day the world was consuming before the crisis. And that is no sure thing.
There is a real risk of a more drawn-out recession that limits oil demand in the United States and around the world for a prolonged period. In that scenario, prices could stay low.
One of the big concerns is that a second wave of coronavirus infections strikes during the second half of 2020, hindering any recovery. The director of the Centers for Disease Control and Protection warned Tuesday in an interview with the Washington Post that a second wave will be more disastrous because it would likely coincide with the start of flu season.
That could force a return to the social-distancing and stay-at-home orders that crippled the oil market in the first place.
Oil prices turned negative. Hundreds of US oil companies could go bankrupt
Oil prices turned negative. Hundreds of US oil companies could go bankrupt
"One of the biggest risks for the oil market is a false restart of the economy," said Neuberger's Wyll.
No one knows for sure how the demand picture will look. Much of that will be determined by the trajectory of the pandemic and the willingness of people to return to pre-crisis activities like road trips, cruises and flights.
Trainer, the New Constructs CEO, is betting they will.
"We're social creatures. We're going to want to get back to normal," he said. "There's a significant amount of the population that will party like it's 1999. They're sitting at home bored out of their minds."
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