Bernstein Research Predicts $150/barrel in 2020

on Sep 21, 2012

Oil Price: Bernstein Research, a sell-side research firm on Wall Street, has issued its “Global Oil Prices: At ‘Base Camp’ Before the Final Ascent” report in which it predicts oil prices to sharply increase starting 2015 and tip over the $150 a barrel level by 2020. According to the 180 pages report, Brent crude will reach $113 in 2015 and continue rising to $158 by 2020. The spread between Brent and West Texas Intermediate (WTI) will decline to around $5.

The forecast comes in sharp contrast to current Brent futures, which are currently priced at $95.52 for June 2015 and $90.64 for June 2019.
Bernstein Research:
“A new thesis in energy markets is that unconventional sources of oil supply will soon outweigh global demand growth, driving oil prices lower – we disagree,”
The company believes the oil market will remain largely balanced for the next two years because of price elasticity – higher prices will lower demand and lower prices will erode supply. This will change in the second half of the decade as emerging markets’ demand will increase in proportion to surges in income per capita.

!m[](/uploads/story/430/thumbs/pic1_inline.png)The report faces serious challenges especially in light of recent developments such as North Dakota’s Bakken shale formation doubling its output from 360,820 barrels per day (bpd) to 609,580 bpd. Bloomberg’s senior analyst for oil and gas Christian O’Neill described the importance of shale as “the beginning of an oil renaissance in North America.” According to the US Energy Information Administration, the United States, with the assistance of its new shale reserves, was able to get to its highest level of oil output in 13 years.

Another factor which Bernstein accredits as determining for higher oil prices is surging production costs in the sector. The report estimates last year’s cost of production for the most expensive new fields to $92 – in case the oil price drops below that, supply will likely be shortened. At least $100 a barrel will be required by Canada’s oil sands producers to receive any satisfactory return on capital.

Oil demand is forecasted to rise from 90 million bpd to 100 million bpd in 2020. To meet the rising demand, OPEC will need to increase its capacity by around 9 million bpd on top of the 35 million bpd it’s already producing. “OPEC producers will prefer to run deficits in world oil supply rather than in their own domestic budgets,” argued the report.

Leaving aside future oil prices, most market observers are currently interested in what will happen with the spread between Brent and WTI – the world’s most heavily traded benchmarks. For about two years the West Texas Intermediate representing the oil extracted from within the US and Canada has traded at a large discount compared to the North Sea’s Brent Crude. According to Goldman Sachs and Pimco the spread between the two benchmarks will narrow. “In the second quarter of next year we think that spread has to come in pretty sharply,” said David Greely, head of Goldman’s energy research. With Saudi Arabia announcing it is willing to increase production and a jump in US inventories, the price of oil will finally be headed down. With Brent falling faster than WTI the spread narrowed from 20.19 on 17 September to 18.04 on the next day.


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