The price of oil has been decimated over the past year. It's down more than 50% from its high of over $100 per barrel in the middle of last year. While no one foresaw the collapse of oil, everyone seems to have an opinion on where it will go next. That's especially true about a return of oil prices over $100 per barrel, a topic on which two billionaires recently gave very different opinions.
Boone Picken's bull case for $100 oil
Back in early December billionaire U.S. oil man T. Boone Pickens said in an interview with CNBC that plunging oil prices would reverse course and rebound to $100 per barrel in the next 12 to 18 months. He based this opinion on his view that OPEC would decide to end its oil price war with non-members and slash its oil production as early as the first half of 2015. Mr. Pickens was quoted as saying that OPEC
Didn't say they wouldn't cut, but OPEC will have to cut, and that is what's going to happen. The Saudis are the ones that make the cut. They can take $70 oil and take it out 10 years -- they have the cash reserves that allow them to do that. But they can't do that to the rest of OPEC.
Mr. Pickens, who has been in the oil industry for nearly 50 years, has seen these cycles before, and knows from experience that OPEC can talk tough, but can only hold the line on production for a short amount of time.
Saudi Prince Alwaleed bin Talal's bear case for $100 oil
On the other side of the $100 oil price debate is Saudi billionaire Prince Alwaleed bin Talal. His view is quite the opposite, as he said this past weekend that
If supply stays where it is, and demand remains weak, you better believe [the price of oil] is gonna go down more. But if some supply is taken off the market, and there's some growth in demand, prices may go up. But I'm sure we're never going to see $100 anymore.
His view is that the days of $100 oil are over, because even if OPEC does cut production that doesn't mean the cut will be deep enough to push oil prices back over $100. He also was quick to point out his view from last year when he said that "the price of oil above $100 is artificial." His view is that surging production from places like the U.S. and Russia have dramatically altered the fundamentals of the oil market to the point where Saudi Arabia needed to stand firm and protect is market share. This is why he thought that OPEC's decision to hold firm on production makes sense. He pointed out that
The decision to not reduce production was prudent, smart and shrewd...Because had Saudi Arabia cut its production by 1 or 2 million barrels, that 1 or 2 million would have been produced by others. Which means Saudi Arabia would have had two negatives, less oil produced, and lower prices. So, at least you got slammed and slapped on the face from one angle, which is the reduction of the price of oil, but not the reduction of production.
He notes that simply cutting production would have only opened the door for other producers to come in and take market share by boosting production. Instead, by holding their ground OPEC is forcing other producers to cut back on investments to slow the growth of rivals. We've seen this in the U.S. as shale produces have slashed spending by 50% due to the drop in the price of oil. So while OPEC might cut some production just to get the price of oil up a bit, it's unlikely to allow it to get back to $100 per barrel, as that price would incentivize U.S. producers to ramp up investments and grow production.
We will continue to see oil price targets all over the map, because its price is impossible to predict given that OPEC is such a wild card right now. If the cartel cuts production the price of oil could rapidly rise, and could even touch $100 per barrel if it cuts deep enough. That being said, OPEC is clearly worried about the growth potential of U.S. shale producers, so it could keep oil prices artificially low for a while to put pressure on U.S. producers to slow down growth. Because of this, investors should expect the wild ride in the energy market to continue.