Oil: Difficult to predict prices in the medium-term – Natixis

Oil prices are a very important variable for the global economy. They determine the income of exporting countries, the situation of the US energy sector, growth and inflation in oil-importing countries, the ability to meet the climate goals, etc. But it is very difficult to predict oil prices in the long-term, due to uncertainty surrounding demand, production, strategies, the durability of the cartels, etc. Furthermore, the price elasticity of demand for oil is low, even in the long-term, economists at Natixis brief.

Key quotes

“It is difficult to predict oil prices in the long-term. This is because it is difficult to forecast demand for oil given the decline in demand caused by efforts to meet the climate goals and the permanent loss of GDP due to the COVID crisis. Low prices lead to a much lower level of investment in exploration and production, which may drive up oil prices in the future. The strategy pursued by OPEC and Russia may continue to change. Will they continue to reduce their production to boost prices? Or will they follow the recovery in demand and increase their production?”

“It is a pity that long-term oil prices are so difficult to predict, as they play a major role in the global economy. Let us assume that oil prices are low in the long term. In this case many countries would be in great difficulty, including some large countries (Saudi Arabia, Iran, Iraq, Algeria, Nigeria, etc.). Shale oil production in the US would be severely affected, given its high producer prices as revealed by the link between the oil price and the rig count. Large oil importers (EU-27, Japan, India, China, Turkey) would have both higher growth and lower inflation. A high CO2 price would become even more necessary to discourage the use of fossil fuels, given their low price.”