Rising Production Risks a Crude Price Slide to $10-$20/bbl, Says Analyst

by Ship & Bunker News Team
Wednesday June 29, 2016

Citing the inevitably of excess production eventually being dumped onto the market, along with slowing global oil demand as well as continued unbridled production from nations such as Iran, A. Gary Shilling states that he is maintaining his call for oil prices to decline to $10 to $20 per barrel.

Ship & Bunker data suggests that such a drop would easily send IFO380 bunker prices in the primary ports under $100 per metric tonne.

Writing in BloombergView, Shilling adds that the U.K. decision to leave the European Union will further slow global economic growth and “reinforces my pessimism.”

He downplays the importance of the “recent spurt” in prices, arguing as many other analysts have done that it has little to do with the fundamentals that caused the price collapse to begin with; instead, he maintains focus on overproduction and oversupply, and points out that even if the U.S. cut production by 600,000 barrels per day (bpd) this year and a further 200,000 bpd in 2017, “excess supply would run at 1.5 million barrels a day until 2017: that’s a continuation of the recent oversupply of 1 to 2 million barrels a day.”

That's because Iran is aiming to double output to 6 million bpd by 2020, and total Organization of the Petroleum Exporting Countries' output has been as high as 33 million bpd; "War-torn Libya is also ramping up production as best it can," Shilling writes.

Shilling combines this with China’s shift from manufacturing and infrastructure spending to services; energy conservation in Western nations; and an overall waning of global economic growth to support his grim pricing scenario.

However, he stresses that a $10-$20 price range, whose shock to the market he thinks would be akin to the dot-com collapse of the 1990s, wouldn’t last long: “recession would squeeze out excess energy production and prices would recover, likely to the average cost of new production.

“But the deflation that might accompany a worldwide economic downturn might mean the new equilibrium price for oil is between $40 and $50 a barrel - well below the $82 average in the first half of this decade, and lower than the assumptions in the business plans of energy producers.”

Matt Smith, director of commodity research at ClipperData, recently noted that China is "importing about a million barrels a day more than they are actually consuming" and that the 135 million barrels stockpiled to date means the nation will hit its maximum capacity of 155 million barrels within a month - which in turn could send crude plummeting below the $40 level.