How Long Will it Take for Global Oil to Recover?

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Oil Crash Graphic
Graphic of Oil Prices
Oil Crash Graphic
Graphic of Oil Prices

Whenever commodities prices crash, the conversation among analysts naturally turns towards when the market hits the bottom. This is not empty talk or a pointless academic inquiry. There’s a lot of money at stake in figuring out the bottom of any commodity group’s pricing. When it comes to oil, the implications of oil bottoming out impacts industry players far and wide. We’re not just talking about oil extractors, oil service companies, or even countries that are overwhelmingly dependent on oil exports; we’re looking at global industry as well.

Well, according to some oil analysts, expect oil to keep sinking. I know this may sound crazy considering the fact that, according to some published reports, the breakeven point for North American shale oil is around $50 per barrel. Below this point, it doesn’t make sense for shale operators to continue, and they would shut in those fields. Logically speaking, this should push the price of oil back up because there’s less supply, right? Well, according to historical analysis traced back to the last time oil went into bear territory, it took nearly two decades for petroleum prices to get back up to where they were before the price of oil crashed. Of course, we’re talking in figures that are adjusted for inflation.

This should give many oil players a lot of sleepless nights. Calling the bottom of oil is not as simple as it may seem. Even if supplies stabilize, given the existing softness in global oil demand driven by a slowdown in global economic activity, the demand might not be there.

Even if oil was to recover enough so that it starts inching towards the $100 per barrel mark, the built in supply infrastructure in North America can easily kick back into gear and start driving prices back down. Both from a structural perspective as well as changes in energy consumption patterns, there are indicators that point to a long bear market for oil. Never underestimate the changes in consumer energy consumption patterns. As more and more countries become aware of global warming and the environmental impact of a fossil fuel-dependent economy, certain structural changes made either at the political level or as a result of more market-driven forces can result in a fundamental shift in energy preferences.

1 COMMENT

  1. The problem with oil is that the expenses are front-loaded at least for old fashioned drilling. So the major costs are already sunk into the well by the time it’s producing oil.

    i.e. So long as the oil it’s producing is covering the costs of production (even if it’s not paying back the costs of exploration), the oil will keep being produced.

    That’s why oil has peaks and troughs… – because the oilfields that are already producing oil will generally continue to do so, resulting in a glut for a while. But then when demand recovers (or some oil wells get closed as they stop covering their costs), and more oil is needed, there’s an extended period (exploration, then going into production, with the possible laying of pipelines, etc.) before any new oil comes online.

    If shale oil can be turned on and off like a tap, that could be beneficial for smoothing out the movement in the oil price, assuming the shale oil companies don’t need the immediate turnover to finance their borrowings, and can sit on the oil and wait for better prices.

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