Societe Generale, however, takes a slightly more sanguine view, writing in its 2016 outlook that, at around $40 per barrel “oil prices have overshot on the downside”.
Pointing to the remarkable growth in US oil production in the past few years (see graph below) and the ongoing game of chicken underway between OPEC (Saudi Arabia, in the main) and the US, Societe Generale points out that: “So far, US non-conventional oil output has fallen only slightly but further cutbacks are to be expected given the breakeven cost stands around $60/barrel on average with a wide discrepancies between oil rigs.”
While it too believes that oil prices can fall further in the first half of 2016, it adds: “we do not see oil remaining much below $40 for long – the price war is already quite painful for key players like Saudi Arabia and we expect greater cooperation among producers to prevent a further slide.”
That said, while non-OPEC supply is liable to drop off as rigs are shut, it is also important to note that one of the differences between US shale production and more traditional types of production is that the rigs can be turned on more quickly and, while rig counts have fallen dramatically – as can be seen in the graph above the speed with which they can be turned back on is likely to keep oil prices from ratcheting up dramatically in future – especially not to the heady heights of $140 per barrel seen in 2009.
“In our view, oil prices should remain stuck at low levels – around the $50 mark – and any upside is likely to be short lived.
