Crude oil price forecast for next week
By Dan Atkinson
08:55, 4 June 2020
Every graph tells a story, but the narrative can change depending which chart you look at.
Go back to the start of the year and look at the near-calamitous performance of crude oil prices.
Brent, the benchmark used in about two-thirds of all oil contracts, saw out 2019 at more than $68 a barrel. Now, it is down to about $35.
Put another way, the price has almost halved.
Don’t write off oil
But the crude oil price trend looks rather different if instead of taking it from the start of the year, you look at it across the course of the last month.
Then, the chart resembles not so much a vertiginous plunge as a sturdy climb back upwards. On 29 April, Brent changed hands at $22.94 a barrel. In other words, it has gained more than $10 a barrel since then, or nearly 50 per cent of its price a month ago.
What happened to the crude oil price? Well, the supply and demand equation has moved in a direction that is more favourable to the oil producers. More on that in a moment.
First, whenever seeking to understand oil-price trends it is important to bear in mind two permanent facts about the market for crude, facts that are in constant tension with each other.
One is that a prolonged downswing in the price of oil is hard to reverse or even to stall, as we saw from the mid-1980s to the year 2000. This constant downward pressure in no way reflected global economic conditions, given that the US and Europe was enjoying what proved to be a 25-year boom that lasted up until the 2008 financial crisis.
The second is that it is always a mistake to write off oil as yesterday’s fuel, one that is hopelessly prone to overproduction and which is being superseded by gas, or nuclear energy or sustainable “green” technologies. However dire the price outlook may seem, however many stories you hear about super-tankers roaming the seas with nowhere to unload their unwanted cargos, oil always bounces back and, for the foreseeable future, will continue to do so.
Looking at the likely path of the crude oil price next week, the only question is – when?
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Negative prices in the past
Prediction is a hazardous business, but there are good reasons to believe the worst is over. Lockdown measures taken to control the spread of the coronavirus are being eased across Europe and parts of America. China, the world’s biggest oil importer, is bullish about the prospects for economic recovery.
Meanwhile, the 13-nation energy cartel, the Organisation of Petroleum Exporting Countries (OPEC) and its allies in the “NOPEC” group of oil-producing countries have cut about 10 per cent out of global supply, a reduction in output of about 10 million barrels per day.
Put increased demand together with reduced supply, and the outlook is sunnier than it has been for some time. Certainly the shock experienced in mid-April where, for a short period, oil prices turned negative to the tune of up to $40 a barrel belongs firmly in the past.
In the current climate, oil producers and traders are not having to pay others to take crude off their hands.
Output cuts and their apparent success in at least stabilising the market point to a third bedrock fact about the oil market which is that many observers are remarkably bad at “reading” OPEC and assessing its next moves. They swing between fearing the cartel’s supposedly-awesome power and dismissing it as a has-been organisation that was powerful in the Seventies but whose clout is greatly diminished.
V-shaped recovery?
In fact, OPEC waxes and wanes over fairly long cycles. Founded in 1960, its first dozen years were marked by general ineffectuality as the decline in the value of the dollar, the currency in which oil is priced, ate into the revenues of member-states. The economist John Tomlinson calculated that, from 1956 to 1973, such revenues in real terms had declined by 25 per cent.
The 1973 Arab-Israeli war and subsequent oil embargo saw prices rise sharply, ushering in about 12 years in which OPEC was a significant power on the world stage, before the 1985-1999 price slide put it in the shade once more.
A credible deal on production curbs sent the price from about $23 in the early 2000s to more than $100 a barrel.
Looking at next week and beyond, it is not unreasonable to expect solid progress in terms of the price. If so, then the horrors of negative pricing seen in mid-April may be seen as some sort of turning point, after which recovery set in.
Much is hanging on the ability of the OPEC-NOPEC alliance to maintain discipline in terms of output, and also on the likelihood or otherwise of a swift bounce-back by major economies – in the jargon, a V-shaped recovery rather than a more shallow L-shaped recovery.
But if these factors do slot into place, then the outlook for oil prices is brighter than it has been for some time.