I've been meaning to write this particular post for awhile, but other priorities have taken up much of my time--finishing up some formal articles--publish or perish!
About a month ago two very different oil price forecasts came out within days of each other. First, a report by Raymond James financial advisers forecast oil at $80 in 2017, and shortly after that publication Gary Shilling came out with a forecast of $10-$20. The RJ forecast is based on projections of a "tightening in supply and demand dynamics" over the next year, though more so on supply issues, and you can read a bit more about their forecast in this Bloomberg article.
Shilling's projection is based on a combination of factors: high inventories; producers pumping oil to generate cash flow in order to survive the shakeout, and the Saudis pumping oil to drive them out; a slowing global economy; and the impact from a rise in the value of the dollar as a safe haven in uncertain times. Shilling's views can be found in his Bloomberg piece here.
It's quite possible that both forecasts are right! Shilling does not provide a time frame, though it appears he is describing a near term crash in prices, whereas Raymond James' forecast is for sometime in 2017. Futures prices suggest some movement higher over the next year, as the price of a July 2017 contract is currently $47.07. However, while the current futures oil price curve is in contango, it is not steep enough to support the oil storage trade. In his piece, Shilling provides some estimates of storage costs: floating storage is about $1.13/month, rail storage 40 cents, and Cushing oil tanks cost 25 cents/month. Given the current contango structure, alternative storage facilities (rail and sea) are no longer profitable, so, as contracts mature from trades that were previously profitable, those traders will have to dump oil into the market, putting downward pressure on prices in the short term.
Therefore, my view is somewhere in the middle. The current market has too much excess crude AND too much excess refined products, as recent reports indicate. While the fundamentals dictate near term crude weakness, it's difficult to see oil falling to $20 or less because investor/speculators (and they dominate trading in futures markets) will be looking for the bottom and an opportunity to start buying again. This is what also puts a lid on future prices of crude: since investors dominate price discovery in futures markets, prices will continue to seesaw and make it impossible for producers to adjust to real forces; that is, prices most likely will not reach a low enough price to create the shake out necessary for stronger future prices.
My best guess is prices will not fall below $30 in the short term, and they will not exceed $70 in 2017, assuming no major supply shock event. Then again, in this topsy turvy world, who would've predicted a guy like Donald Trump would have a shot at becoming president of the United States....
