Perhaps no other discussion on energy-related topics has been as polarizing as the debate over the general direction of oil prices over the next several years.
On the side of the bears, Citigroup (NYSE: C) argued in a recent research paper that global oil demand is "approaching a tipping point." The combination of falling demand in developed countries and two other factors -- the transition toward natural gas as a fuel source and improving fuel efficiency for new vehicles -- led the bank to conclude that, by the close of the decade, oil prices are "likely to hover within a range of $80-90/bbl."
On the other hand, the bulls argue that prices will remain buoyed by the high marginal costs of production for unconventional oil -- which includes U.S. shale and Canada's oil sands and continues to gain a larger share of the total market -- and that rising demand from emerging economies will push prices generally higher over the next several years. According to estimates by the Organization for Economic Cooperation and Development, oil prices could close out the decade in a range of $150 to $270 per barrel, bolstered by emerging-market growth.
Though the debate continues to rage, the oil bears just got a new supporter on their side. And one with a great deal of credibility and clout. Let's look at why he thinks oil prices could fall over the next few years.
Eni's chief executive forecasts lower oil prices
According to Paolo Scaroni, chief executive of Eni, one of the largest energy companies in Europe, oil prices are likely to fall over the next few years. Barring an unexpected surge in global economic growth, the combination of stagnant oil demand and surging new supplies means that oil prices are "more likely to go down than up" over the next two to five years, he said.
Scaroni's forecast is predicated upon his view that the huge disparity that currently exists between oil and U.S. natural gas prices (on an energy equivalent basis) is an anomaly that will be corrected over time. Currently, the benchmark U.S. gas price at Henry Hub is a little over $4 per MMBtu, while liquefied natural gas imported to Asia fetches around $15 per MMBtu. Meanwhile, oil remains about six times as expensive as U.S. natural gas on a BTU-equivalent basis.
Over time, Scaroni argues, market forces will act to narrow both gaps. "These two anomalies, once corrected, move us toward a world in which gas prices are higher and oil prices are lower," he was quoted as saying in the Financial Times. Indeed, the price difference between oil and natural gas has already led to a surge of demand from the U.S. transport sector, especially among long-haul trucking fleets.
Growing demand for natural gas
For instance, Waste Management (WM -0.52%) reckons that, over the next five years, four-fifths of the new trucks it buys will run on natural gas and that, by 2017, its fleet will burn more gas than diesel. Similarly, truck maker Navistar (NAV) estimates that, within a couple of years, a third of the new trucks it sells will burn natural gas instead of diesel.
Though adoption rates for natural gas vehicles outside long-haul trucking have been disappointingly low, a host of companies are working hard to change that. For instance, engine manufacturer Westport Innovations (WPRT -0.61%) is collaborating with auto manufacturers to develop more advanced dual-fuel technologies for passenger vehicles, such as Ford's F-450 and F-550 Super Duty Chassis Cab trucks.
Meanwhile, Clean Energy Fuels (CLNE -2.18%) is plugging away at developing the other necessary component to promote natural gas vehicle usage -- refueling infrastructure. The Seal Beach, Calif.-based company already fuels tens of thousands of vehicles each day at various strategic locations across North America and is planning on building an additional 70 to 80 LNG fueling stations this year.
Final thoughts
If the shift toward natural gas in the U.S. transport sector picks up speed, it could have significantly implications for oil prices, according to Scaroni. Even if natural gas prices remain within a range of $5 to $6 per MMBtu, while oil remains at around $90 per barrel, it would lead to a large shift away from oil and toward gas within the U.S. transport industry. This, Scaroni argues, would exert additional downward pressure on the price of oil.
What do you think? Does Scaroni's view hold water? Or is he overestimating the pace at which the transport sector will shift toward using natural gas?
