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Commonwealth Bank: Crude oil will trade from $35 to $55 per barrel until 2020

Don't look for a sharp recovery in the crude oil price any time soon, it's likely to oscillate between $35 to $55 per barrel for the remainder of the decade.

That's that the view of Vivek Dhar,
mining and energy commodities
analyst at the CBA, who suggests that unless OPEC cuts supply in order to rebalance the market, the price is likely to be capped in the mid-$50 region due to the likelihood of marginal US shale restarting production.

"Oil prices should lift on average in
2Q16 and 3Q16 as US oil supply
continues to track lower and demand picks up, but high OECD inventories,increasing Iranian crude oil output and a potential restart of US oil shale output at around US$55/bbl should lead oil lower again in 4Q16 and 1Q17,"
says Dhar.

"OPEC crude oil output should lift by around 1 million barrels per day (mb/d) over the next year as Iran boosts output and as other OPEC members maintain current production rates."

Beyond 2017, Dhar anticipates that
"crude oil prices to steadily increase to US$50-55/bbl by mid-2018, before triggering another round of US shale oil restarts as cost reductions continue
in the non-OPEC oil and gas sector".

Although the reasoning behind the call is perfectly reasonable, as anyone who's attempted forecasting knows, it can be fraught with danger, and in
some cases can lead to outright
embarrassment.

Keeping this in mind, Dhar offers a
series of factors that could scupper the bank's forecasts, both to the upside and downside.

He suggests that a sharper-than-
expected reduction in US shale oil
production, an increase in global
demand, particularly from OECD
nations, an unlikely disciplined supply response from OPEC producers, an increase in industrial action and crude
producers and further lowering of US rate hike expectations would all be supportive of crude prices moving forward.

Counteracting those upside risks, he notes that high OECD stockpiles, lower breakeven costs for US shale wells and stronger production could add to downside risks moving forward.

"Stronger production from OPEC
nations in wake of the failure to secure a cap in crude oil output could weigh on crude oil prices. Saudi Arabia has already signaled this as a real possibility, potentially adding 2-2.3 mb/d of crude oil output," says Dhar.

"This has the risk of leading to an all-out disintegration of OPEC, as member countries compete aggressively with each other to secure market share.
Saudi Arabia is best placed to increase its market share as it accounts for around 2/3 of OPEC's spare capacity."

The chart to the right, again supplied by Dhar, reveals current OPEC production, measuring it against its potential daily maximum output.

Source
Business Insider Australia.
www.josiahdele.blogspot.com

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