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Could oil prices fall to $20 a barrel?

Could oil prices fall to $20 a barrel?

Oil prices on world markets (09 December 2016 10:46)
Oil prices fall on world markets (08 December 2016 11:46)
Oil prices fall on world markets (07 December 2016 11:46)

Date: 10 December 2015 15:17

Baku, Azerbaijan, Dec. 10

By Aygun Badalova - Trend:

Despite the possibility of oil prices to further fall in the near term, analysts of the British economic research and consulting company Capital Economics don’t expect them to reach $20 a barrel.

“In principle, prices could fall further in the near term. The running costs of an established US shale well can be as little as $20 per barrel, meaning that some production is still profitable above this level. But in practice, we do not expect prices to fall anywhere near $20, or at least not for very long, for three main reasons,” Julian Jessop Chief Global Economist at the company said in a report obtained by Trend.

First, according to the economist, any remaining investment in new production, which is already being cut back, would surely evaporate.

“Indeed, the further that prices fall in the near term, the larger the non-OPEC supply response is likely to be, and the stronger the subsequent rebound. This is a potential V-shaped scenario in which prices might actually end 2016 higher than they would otherwise have done,” Jessop said.

What’s more, he believes, while Saudi Arabia and its allies would surely not want oil revenues to fall much further, this short-term pain may be the price that has to be paid to squeeze out higher cost producers elsewhere.

Second reason, according to the economist, is that the current imbalance in oil markets reflects both strong growth in supply and weak growth in demand. Lower prices are part of the solution on the demand side too and should provide an increasing boost to global economic activity in the year ahead, he believes.

“Third, we expect other headwinds to fade in 2016. In particular, the big gains in the US dollar are now in the past and sentiment towards commodities in general should recover, due in part to fading fears about China,” Jessop said.

Global oil prices plunged from about $108 in the first half of 2014 to below $40 currently due to glut in markets.

On the New York Mercantile Exchange, January futures for WTI decreased by 0.9 percent to $37.16 a barrel on December 9. January Brent crude on London’s ICE Futures exchange decreased by 0.4 percent to $40.11 a barrel.

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