Reader Michael forwarded a new research piece from Oppenheimer by Fadel Gheit and Daniel Katzenberg that makes the case that oil prices will continue to decline. A core element of their thesis is that OPEC will not defend prices above $60.
Here are the main arguments (boldface theirs):
Given the bleak global economic outlook, we think world oil demand is likely to be substantially below current forecasts, as we expect steeper declines in developed countries and much smaller growth in developing countries. Despite the pullback from the $148/b record, we believe oil prices are still inflated and not supported by supply and demand, and the longer they remain high the deeper the recession is likely to be and the longer it will take for the global economy to recover. Lower oil prices could help boost consumer confidence and spending and accelerate economic recovery, which is also in the best interests of OPEC longer term.
Hype Artists. Outrageous oil price predictions by investment banks have been self-fulfilling prophecies in recent years, since those banks are also among the largest oil traders as brokers and principals, dealers in financial derivatives, clearing houses for other traders and owners of energy assets. Tighter government regulations under a new administration are likely to curb their activities and deflate oil prices.
Government Regulation. We believe the surge in oil prices in the last five years is a result of the same bad government policies of deregulation that caused the global financial crisis. The demise of the investment banking industry, tighter regulation, and low appetite for risk should significantly curtail speculation and lower oil prices.
OPEC Dilemma. We estimate that OPEC generated more than $3.5 trillion in oil export revenues in the last 5 years, which exceeds its revenues in the previous 15 years. We believe more than $1 trillion of that amount was a direct result of excessive speculation. We don’t expect OPEC to aggressively defend oil prices above $60/b, since higher prices slow economic and demand growth, which are not in OPEC’s best interests.
Energy Policy. In addition to tighter regulation of energy trading, we expect the new administration to focus on reducing dependence on foreign oil by increasing domestic production, expanding use of alternatives and accelerating conservation. Higher oil prices undermine U.S. economic growth and national security.
Increased Supply. The oil market is not a free market, since 55% of world oil supply is controlled by OPEC and Russia. High oil prices give oil exporters less incentives to allow foreign companies access to energy resources, while lower oil prices force them to do the opposite.