Barclays rebound speed

Oil prices will rebound much quicker than market is predicting, Barclays says

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Oct 15, 2015 5:01 a.m. ET​

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Oil will rise to $85 a barrel by 2020, analysts say​

AFP/Getty Images

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By
SARASJOLIN

MARKETS REPORTER
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Oil prices are likely to jump much faster than the market currently expects, in order to meet expected demand by the end of the decade, according to Barclays’s analysts.
In the bank’s latest analysis of the oil market, dated Oct. 14, its strategists forecast that Brent oil LCOX5, -0.92% will rise to $85 a barrel by 2020, in their base-case scenario. That level is a far cry from the $65 a barrel that the futures curve is indicating at the moment.
Even in the bank’s low-demand scenario, the forecast of $75 is well above the futures curve, while Barclays’s high-demand case predicts prices at $100.
Brent traded around $49.50 a barrel on Thursday, while crude oil CLX5, +0.66% was at $46.17.
“Under any reasonable demand scenario (ranging from 0.9 million barrels a day to 1.4 million barrels a day of annual average demand growth from 2016-2020), prices need to move higher than what the oil-futures market is currently pricing in, or there will not be enough supply,” the analysts led by Michael Cohen, said in the report.


The Barclays strategists argued that with prices at their current historic low levels, energy companies won’t be sufficiently encouraged to continue to produce oil, because they are at risk of losing money.
Additionally, capital expenditures in the oil industry have been rapidly declining in response to the price slump. That suggests supply from existing fields will fall, while new projects won’t come online to replace them.
“With capex expected to fall by 20% globally in 2015 and a further 5-10% in 2016, the stage is set for a supply crunch,” the Barclays analysts said. “After some excess stocks are used up in 2016 and 2017, we believe the price appreciation seen thereafter is likely to be permanent.”
Barclays sees Brent prices rising to $63 a barrel in 2016, $65 in 2017, $74 in 2018 and $83 in 2019, before reaching $85 in 2020.
“What happens to oil-market balances after 2016 depends critically on three main wild cards: a slowing China’s impact on oil demand, the return of Iranian oil and the rate of mature-field decline. Although the first two are potentially negative, we think that an acceleration in decline rates will prove to be the dominant factor driving prices,” the bank’s team said.​

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