Recently, Saudi Prince Alwaleed bin Talal made a bold prediction—he asserts that we will never see oil prices hit $100 per barrel again. This statement, if true, signals a significant shift in the oil market.
He stated, “If supply stays where it is, and demand remains weak, you better believe [the price of oil] is gonna go down more. But if some supply is taken off the market, and there’s some growth in demand, prices may go up. But I’m sure we’re never going to see $100 anymore,” as reported by Prince Alwaleed bin Talal, a billionaire in Saudi Arabia.
This prediction marks a striking turnaround. Who could have foreseen back in June 2014, when oil was priced at $107 per barrel, that it would plummet to around $40 by January 2015? We haven’t come across anyone who anticipated this—not even industry experts.
For instance, Southwestern Energy was caught off guard; in October, they invested $5.3 billion in oil reserve properties from Chesapeake Energy. Just a few months later, the steep decline in oil and gas prices has significantly diminished the value of these assets, leading to a sharp decrease in their stock price. Last April, shares of Southwestern Energy traded at $48, but now they hover around $23—a staggering 50% loss in just nine months.
Forecasting $39 Oil
Unfortunately for oil producers, the outlook appears grim. Major financial institutions are predicting further declines. According to Bloomberg, analysts at Goldman Sachs suggest that oil prices—which have decreased by over half since June—may need to drop even lower to stabilize the market between supply and demand.
Goldman Sachs explained, “With OPEC resisting a production cut to stem the price slide, output reductions will come from U.S. shale drillers, who are pumping at the fastest pace in three decades. Excess storage and tanker capacity indicate that the market can sustain a surplus longer than it has in the past. Thus, oil prices around $40 for six months will be essential to curb U.S. production.”
In summary, Goldman Sachs believes a 63.5% decline from June 2014 prices is necessary to correct market imbalances, pointing to a substantial overproduction and an undershot demand.
Understanding Oil Demand Dynamics
Lower prices typically stimulate demand while discouraging production, suggesting that over time, these forces will stabilize. However, we find ourselves questioning how the market divergence became so pronounced in the first place.
In addition to the increased supply over recent years, could there be other factors contributing to the plummeting prices? Shouldn’t the market have adjusted more gradually had everyone foreseen the influx of new supply? What exactly is transpiring here?
At Economic Prism, we suspect that broader economic factors are influencing the situation. There’s a prevailing belief that while the U.S. economy shows signs of improvement, major global economies—Japan, China, and Europe—are struggling. Is this a reflection of reality, or merely a misconception?
Market investors seem conflicted. They exhibit erratic behavior—one day, the DOW might surge by 300 points, only to lose those gains the next. This volatility might indicate that oil’s rapid price descent mirrors a broader economic slowdown, encompassing the U.S. and beyond. Reduced economic activity and GDP typically lead to diminished oil requirements, suggesting that the recent price corrections may be driven more by falling demand than by increasing supply. A significant indicator will be when the DOW dips below 17,000.
Best regards,
MN Gordon
for Economic Prism
