How low can Saudi Arabia go?

Last week oil prices fell to levels not seen since 2004, with Brent crude hitting $36.05pb which is a fall beyond even that set on Christmas Eve in 2008 following the financial crisis. In June 2014 producers were getting $115pb.

There are several reasons for this – excess production, stockpile glut, expectations of a demand drop and the removal of a ban on US oil exports. As The Week reported, “Oil companies and countries dependent on revenues from ‘black gold’ might be forgiven for thinking that things cannot get much worse. Goldman Sachs, however, believes that they can.”

At the start of the month Goldman Sachs said, “While [we are] forecasting oil prices over the next few months to be near $40 a barrel, or roughly where they are trading today, there could be another 50% to fall.” The doom-mongers are not alone. Patrick Pouyanne from the French company Total warned, “Supply will grow faster than demand next year.”

However there are a multitude of views that say the average price next year will be higher than it was this year. The Times’ Liam Hannigan said, “There is now widespread speculation that crude could tumble much further – maybe even as low as $20. I don’t buy that. Just as fast as crudes prices have fallen over the past year or so, they could easily spring back again. One reason is that these recent drops reflect supply patterns that are driven almost entirely by geo-politics – and geo-politics can quickly shift.”

Organisations are said to be making significant purchases of energy stocks while there’s a buck to be made ahead of an inevitable recovery. As the International Energy Agency predicts global oil demand will rise from an average of 94.6 million bpd to a record 95.8 million barrels in 2016, ABN Amro and Morgan Stanley believes a price recovery is on the cards with others saying it’ll range between $50 and $80.

A lot of optimism but it relies on one key development as outlined by Reuters: “With oversupply estimated between 0.5-2 million bpd, it would only take OPEC pulling back from its current output of more than 31.5 million bpd to its long-standing quota of 30 million bpd to re-balance the market.”

Therein is the fly in the cranberry sauce. It’s no secret that OPEC is going through considerable internal upheaval but so far the hell for leather price plunge has not been derailed. However at least one big producer looking in predicts change. Saxo has published a list of 10 “outrageous predictions” which includes an aggressive limit on supply coming round the bend. Ole Hansen thinks with the imminent removal of Iranian sanctions prices will tank and OPEC will cut production, enabling a rally in the market.

How low can Saudi Arabia go? That will be the question for the coming year.