Nov. 25–Just a month after hitting a four-year high of more than $76 a barrel, crude prices have plummeted about 25 percent to their lowest level in more than a year.
That quick U-turn from bullish to bearish sentiment has raised concerns for at least one commodity trading and risk management expert, who said oil and gas producers could see sub-$20 prices by 2023.
“Am I sure it will happen? No. But it does give me pause,” Ryan Dusek, director with the energy consulting firm Opportune LLP, said in a phone interview.
Dusek said he’s been watching a long-term pattern and the sharp turn from four-year highs to one-year lows fits a pattern that goes back to 2008.
“If you look back at some of those dates, and you go back to 2008, prices hit $150 and four months later they were at $30,” he said. By 2014, prices were back up to $112 a barrel, only to fall to $26 a barrel by early 2016, he said.
“I’ve often heard that if oil prices go up, they use the stairs and they use the elevator on the way down. When you look at price trends, the downward movements have been so fast they’ve been almost devastating,” Dusek said. “The upside is slow. I don’t think this (bear market) is over yet.”
That doesn’t mean there won’t be higher prices in the interim, he said.
“I’m very bearish on what I see. That doesn’t mean the market won’t turn bullish, but I feel prices are definitely on the decline. It wouldn’t surprise me if they hit sub-$20.”
If there is good news in his assessment, Dusek said prices could return to the $70 to $72 range again within the next year.
“That should give producers enough time to put longer-term hedges in place,” he said.
A great hedging plan will help producers weather a return to very low oil prices as seen in 2015-2016, he said.
“I don’t know how many companies could hold on again,” he said.
Low oil prices should also drive the trend toward consolidation that had been expected three years ago, Dusek said.
What is driving the downward movement in prices is supplies, according to Dusek.
“The way I view it, Russia, Saudi Arabia and President Trump have the upper hand. And the only one with the incentive to lower prices is the U.S.”
Market trends are more on the bearish side, particularly the strength of the U.S. dollar, he said.
“A stronger dollar means lower commodity prices, and crude oil will be hit hardest because it is priced in dollars,” he said. “That’s a long-term story that has legs.”
If there is further good news in Dusek’s expectations, it’s prices below $20 “should be the bottom, in my opinion, and if you’re riding out $20, you should be good. The market will return. The longer-term market will be very bullish from that floor.”
Dusek said he hopes his interpretation of long-term patterns is wrong.
“If I’m wrong, good. If I’m not, a lot of companies will get hurt,” he said.
If he’s wrong and prices rebound quickly and break $80, “it’s a whole new game. It’s just not what I’m seeing.”
His main goal is to raise awareness among the industry and among Opportune’s clients so they can be proactive and take hedging precautions, he said.
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