US, WASHINGTON (ORDO NEWS) — Oil markets began the 2020s with the fact that for the first time in history, they fell below the zero ($ 0) price per barrel. Investors and analysts are trying to figure out what awaits them in the coming decade.
Some believe that the crisis will be followed by a boom – predicting that investment in oil and gas production will run out and prices will jump above $ 100 per barrel.
“The pressure from funding will be huge. Some manufacturers will have a really hard time, ”said Trevor Woods, director of investment at the Northern Trace Capital hedge fund from Ohio. “By 2025, we can easily reach $ 150.”
Others, on the other hand, believe that the pandemic has cemented the era of cheap oil – even after the threat of coronavirus infection has lost its initial severity.
The debate over the long-term development of the world’s most important energy source is not easy. Oil markets have dozens of variables, and this makes forecasting difficult.
In the long run, most analysts agree that prices should aim at a level where producers produce enough oil to cover demand while making a profit. Covid-19 complicated this calculation. Investors are not sure whether the pandemic will change the structure of transport and consumption forever in the direction of decline, or, conversely, will give impetus to progress, accelerating the transition to cleaner energy sources.
Falling to negative values at the end of April, oil prices began to recover quickly – which was facilitated by the rise in the Chinese economy and a decrease in production from the Organization of Petroleum Exporting Countries (OPEC), Russia and producers in North America. But growth stalled amid new outbreaks of coronavirus that threaten to undermine demand for fuel in the southern and western US states. Futures on West Texas Intermediate, the main brand of US oil markets, have been trading at around $ 40 a barrel since late June.
The reason for the growth is that asset managers and banks refuse to finance the necessary investments in existing and prospective oil wells, and there is a shortage of oil.
Oil companies have already cut spending plans in an attempt to stabilize their budgets in response to a loss of income due to the pandemic. Exxon Mobil Corp, which warned last week of heavy losses in the second quarter, said it plans to cut capital spending in 2020 by $ 10 billion (30%).
Large European companies also have to respond to investor pressure to reduce their carbon footprint. BP PLC cut its investment plans by 25% to $ 12 billion and is considering developing underdeveloped oil and gas fields.
In general, it is expected that investments in exploration and production of oil and gas assets this year will be reduced by 32% to 328.4 billion dollars. In May, the International Energy Agency said it was the largest drop in a decade.
According to JPMorgan analyst Christian Malek, such belt tightening will affect long-term oil production. According to his estimates, five million barrels a day will fall out, or about 5% of the level up to covid-19, and by 2030 in order for production to satisfy demand, an additional $ 625 billion will be required.
According to Malek, in order to stimulate the production of new oil, prices will rise faster than before. This is partly due to the fact that investors advise companies to produce better oil and reduce methane emissions, and this increases production costs.
“Can oil exceed $ 100 in the next two years? Just like,” Malek believes.
Richard Fullarton, director of investment at Matilda Capital Management London Investment Fund, estimates that the price of oil will exceed $ 100 per barrel in the second half of the 2020s.
“Physically, oil does not end,” he said. “We will throw capital to gain access to it.”
Such forecasts diverge from the futures market, which for the remainder of the decade suggests that Brent crude oil will not cost more than $ 60 per barrel. The market is overestimating how fast the world is moving away from fossil fuels, says Woods from Northern Trace. He agrees that prices will rise and possibly exceed the 2008 Brent peak of $ 148, pushing shale oil producers in the US and elsewhere with simple production.
The transition to green energy – for example, wind and the sun – is fully supported by business leaders, but outside the European Union this policy is being implemented very slowly, Woods said: “Therefore, the use of fossil fuels will continue to grow.”
For others, a return to $ 100 is fantastic.
According to Citigroup analyst Edward Morse, oil producers will be able to produce more than enough oil at $ 50 per barrel. Its logic: technological innovations will reduce production costs, and the pandemic encourages people to continue to work from home and travel and travel less, which will limit the demand for oil.
According to Morgan Stanley analyst Martijn Rats, OPEC will keep the market under control. According to him, when peak demand looms, Saudi Arabia and other producers of cheap oil will open cranes, but not to keep prices, but to conquer more market.
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