The Reason to Expect Prolonged USD 30–60/bbl Oil

Abstract

Management Since 1982, the year oil prices were deregulated in the US, the import oil price to the US has averaged USD 52/bbl in 2015 dollars. It is volatile, having a monthly standard deviation of 9%, although volatility ebbs and flows. The global oil price, like the price of any commodity or security in a free and open market, incorporates all available information almost instantaneously and follows a random walk pattern. With the above factors in mind, what can today’s oil and gas professional expect for the near- to mid-term oil price? Although the answer may not be welcome, a fairly stable set of conditions coalesce to make a strong reason to expect the oil price to generally range between USD 30/bbl and USD 60/bbl for the foreseeable future. The Global Macro Situation To understand the situation, it is helpful to first look at two global macro factors. First, the world consumes approximately 90 million bbl of oil every day. And second, three countries, Saudi Arabia, Russia, and the US, are the largest suppliers, with each producing between 9 and 11 million BOPD (Table 1). Beyond these three countries, production drops precipitously. The Organization of Petroleum Exporting Countries (OPEC) produces approximately 30 million BOPD. Although OPEC may attempt to collude and control oil prices, world history has repeatedly proved that global cartels generally cannot control markets for any sustained period of time. This article is not about geopolitical forces, but one can quickly see that OPEC members have distinct cultures, governments, customers, and priorities, as well as different production and reserve replacement costs. Hence, it is unlikely, and perhaps even unrealistic, for OPEC members to uniformly agree on production quotas and then expect each member country to behave accordingly. Therefore, it is probably a good assumption that global oil prices will submit to global market forces; i.e., oil prices will likely continue to depend on the supply and demand equation of competing producers and consumers.