Whilst oil prices might spike higher in the short-term, analysts at Handelsbanken expect the price to remain low longer-term as new sources of production keep global supply ‘pumped’.
Oil will spike in the short-term but longer-term it will fall back down to 30 dollars per barrel according to research published by Handelsbanken Capital Markets.
Those hoping that there will be a rebound in the price of oil as shale oil production falls, reducing global supply, will be dissappointed according to Handelsbanken’s analysis.
Instead of shale operators going bankrupt due to the relatively high cost of production using this method, as some analysts believe, Handelsbanken argue many shale producers will actually survive, lower their costs and continue producing.
“In the longer term (12 month), shale oil continues to lower breakevens and any oil price spike will be met by increased shale oil activity under protection from short paybacks on investments and the ability to sell production on a steep contango forward curve (contango is when forward prices are higher than spot prices).”
“Accordingly, we expect the oil price to land in the low USD 30/bbl range at the end of 2016, and we believe oil will trade lower in 2017 than in 2016.”
Bankruptcy is not the end
Jansson believes the shale market is beginning its final “financial countdown” as the low price of oil precludes the high cost of shale production, which is in the region of 70 dollars per barrel.
However, rather than shale producers going bankrupt and disappearing Jansson thinks they will be ‘saved’ from bankruptcy and become ‘zombies’ just as happened to many banks which were bailed out following the crisis.
Essentially they may continue producing oil even if they cannot meet their debt obligations:
“However, bankruptcies do not mean the days are numbered for production.
“This is particularly true in the US where seeking protection from bankruptcy means debt holders will rid themselves of payments, but the oil market will not eliminate production.”
“Not even bankruptcy will stop the oil glut” the paper argues, using examples from mining and coal industries to show that widespread bankruptcies do not automatically lead to a fall in production:
“Some people think that if a company goes bankrupt, everything just stops, but the recent downturn in the mining industry shows that it is a slow process.”
The Handelsbanken report argues there are many ways shale producers could continue to operate even after bankruptcy proceedings have begun