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Why History Suggests that Crude Oil May Be Low for Next 2 Decades

Price channel 

February WTI (West Texas Intermediate) crude oil futures contracts trading on NYMEX are following a long-term falling trend. Prices are trading close to 2009 levels. They have fallen more than 60% in the last 18 months. Record production and pessimistic sentiments are dragging oil prices to record lows.

Scenario one

Oil prices could trade lower between $25 per barrel to $35 per barrel due to record production from OPEC to the US. Iran is expected to flood the oil market with 1.5 MMbpd of crude oil in the next two years. Libya, Indonesia, and Iraq are also ramping up production. The weak demand from China and the US dollar (UUP) could further put pressure on oil prices. Goldman Sachs (GS) estimates that in the worst case scenario, crude oil prices could reach $20 per barrel in 2016. Venezuela’s government suggests oil prices could fall to $25 per barrel if OPEC continues to produce at record levels.

Scenario two 

The US crude oil prices could trade between $40 and $50 per barrel in 2016. The US production could slow down by 500,000 barrels per day in 2016. This scenario would also require OPEC to stay at current levels and not ramp up. The EIA (U.S. Energy Information Administration) estimates that Brent crude oil prices will average $56 per barrel and WTI crude oil prices will average $51 per barrel in 2016. Barclays estimates that WTI could average $56 per barrel and Brent could average $60 per barrel in 2016. Moody’s estimates that WTI prices could average $40 a barrel and Brent could average $48 per barrel for the same period.

Higher oil prices benefit oil giants such as Occidental Petroleum (OXY), Eni (ENI), Royal Dutch Shell (RDS.A), Total (TOT), and Petrobras (PBR). They also affect ETFs such as the iShares US Oil & Gas Exploration & Production ETF (IEO) and the PowerShares DWA Energy Momentum ETF (PXI).

Scenario three

US crude oil prices could trade between $50 and $60 per barrel in 2016. Prices rallied due the delayed scaling up of production from Iran due to operational and investment issues. US production slowed down more than expected due to the bankruptcy and spending cutbacks from major oil companies. However, there is one more possibility for oil prices to trade lower for the next two decades. Similar to the oil market crash of 1985-1986, this could occur if Iran and Libya scaled up and sustained production at a lower price environment.