How High Can Oil Go?
We reiterate our call for oil to trade as high as $65 this year. The glut is over, and soon all the talk will be about shortage. The math is simple: a year from now demand will be 1.13 million barrels per day higher, and US production will be 750,000 barrels lower. Where is the missing 1.88 million barrels going to come from? Not Iran. As US operators see oil prices rise from here into the $50s and the $60s, drilling will resume and fracklogs will begin to come down. As the industry and its financiers return to health, we’ll have a definitive end to the mini-recession caused by too-low oil prices. But US operators will have to swim upstream against net exhaustion of legacy wells of 115,000 barrels each month, and do so with an impaired ecosystem of services suppliers and frack crews. We will find a supply-creating price, and an equilibrium where a transformed oil industry can flourish, and consumers can still enjoy relatively low prices.