By Nicole Friedman
Plunging oil prices in the second half of 2014 upended global
economic forecasts, boosted consumer spending and roiled markets
from Moscow to Midland, Texas.
Now, analysts and investors--U.S. prices dropped from $107.26 a
barrel in June to $53.27 a barrel as of Wednesday--are calling low
prices the new normal.
Investors and traders say a price recovery likely won't come
until the second half of 2015, as U.S. oil output keeps rising and
subdued global growth weighs on demand. It will take months for the
global glut of oil to shrink, market participants say. Producers
will be slow to cut back on drilling, and consumers won't change
their buying habits right away.
Analysts say prices could fall further as wintertime heating-oil
demand recedes in the second quarter, and U.S. drivers will reap
the benefits in the form of cheap gasoline. Bankers and investors
are watching for a new wave of deal making in the energy industry,
as weak and highly leveraged companies struggle to withstand low
prices.
"We have yet to restore balance to this market," said David
Martin, head of global oil strategy at J.P. Morgan Chase & Co.
"One can reasonably expect that there's further price downside in
the short term."
J.P. Morgan expects oil prices to bottom in the first quarter.
For the year, the bank sees global benchmark Brent crude averaging
$82 a barrel and U.S. prices averaging $77.25 a barrel.
This past year was expected by many to bring stable,
triple-digit oil prices. Chevron Corp.'s chief executive declared
in March that "the $100 barrel is the new $20," and traders
complained that several years of low volatility had made it
difficult to make money buying and selling oil.
Now, analysts and investors say the only certainty is
volatility, as the global crude market adjusts to ample supplies
and tepid global growth.
U.S. production has soared to its highest level since 1986 due
to new technologies enabling producers to access oil trapped in
shale-rock formations. U.S. imports of crude have fallen from a
peak of 10.8 million barrels a day in June 2005 to just 7.5 million
barrels a day in September. That leaves exporters competing to sell
the barrels that used to go to the U.S. to other markets, mainly in
Asia.
As an oil oversupply emerged this past summer, companies and
analysts called for the Organization of the Petroleum Exporting
Countries, a group of 12 oil-producing nations, to reduce its
production to prevent prices from falling. At its November meeting,
OPEC declined to do so, and prices sank in response.
For years, oil has been seen as less volatile than other
commodity markets because of the presence of OPEC. Investors are
now questioning whether the group has lost its power.
"OPEC basically just said, 'We can't do this collectively. We
are no longer the dominant producer,'" said George Zivic, who
manages the $384 million Oppenheimer Commodity Strategy Total
Return Fund. "The previous 30-year regime in oil has changed."
Others disagree, and some analysts expect OPEC to call an
emergency meeting to respond to low prices before its next
scheduled gathering in June. "I think it's very much too early to
write off OPEC," said Ian Taylor, chief executive of oil trader
Vitol, at the Platts Global Energy Outlook Forum in December.
Without action from OPEC, individual companies or countries
would need to produce less oil to cut back on the current
oversupply, which is estimated by analysts to be as high as two
million barrels a day.
But companies will reduce investment in drilling new wells
before they shut existing ones, meaning it could take months for
supply growth to slow. And as drilling has become more efficient,
many shale-oil producers can still make money churning out crude at
current prices.
On the demand side, low oil prices are expected to boost the
struggling global economy. Consumers saving money on gas can spend
more on other purchases. Drivers will especially benefit in the
U.S., where low oil prices generally lead quickly to low gas
prices, without currency fluctuations or fuel subsidies cutting
into the reductions, as in some other countries.
But after years of high gas prices, consumers have become more
efficient, and so have their vehicles. While demand is liable to
perk up as oil prices stay low, that won't happen right away,
analysts say, especially with the global economic growth
subdued.
To be sure, a sudden change in supply due to a geopolitical
event or OPEC decision could send prices higher. Barring that, most
market watchers call for prices to recover somewhat in the second
half of 2015 as supply and demand come into balance. But it could
be years before traders buy and sell $100 barrels again, analysts
say.
Of $60-a-barrel oil, said Vitol's Mr. Taylor, "we might have to
live here for a much longer period than perhaps, at the moment, we
are expecting."
Write to Nicole Friedman at nicole.friedman@wsj.com
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