U.S. oil prices could sink to $50 a barrel at some point over the next two years, according to analysts at Bank of America Merrill Lynch. The U.S. government may have to approve oil exports if it wants the domestic oil boom to continue as $50 a barrel is below the cost of production.
But don’t expect a corresponding drop in gas prices.
Merrill analysts expect U.S. oil prices to still average about $90 a barrel over the same time period. Global oil prices meanwhile, which more closely dictate the price of gasoline in the United States, are expected to remain high as growth in global oil supplies lags population growth and economic output.
The drop in U.S. oil prices would likely be temporary, caused by the difficulty in moving huge amounts of new oil from places like North Dakota’s Bakken shale or Texas’ Eagle Ford to market. Already, all the new production has led to a glut of oil in the region.
“No one expected output to grow by a million barrels per day last year,” Francisco Blanche, Merrill’s head of commodity research, said at a press briefing in New York. “No one.”
As a result, oil has been accumulating in Cushing, Okla. — home to the convergence of several pipelines and dozens of oil storage tankers that acts as the delivery point for the most commonly quoted U.S. oil price, West Texas Intermediate.
The problem for U.S. drivers is that WTI crude accounts for just a small percentage of the oil used to make gasoline in the United States. And prices for other types of oil — such as Louisiana Light Sweet, Alaskan North Slope or Nigeria’s Bonny Light — remain high.
In fact, Blanche said the U.S. government may have to approve exports of WTI if it wants the oil boom in this country to continue, as $50 a barrel is below the cost of production.