It seems like every day someone is making headlines with a bold call on the future price of crude oil. All have valid arguments as to why oil will, or will not, return to triple digit prices. Some are just talking their book, as they have much to gain from where oil prices settle out in the future. Others are simply being cautious because caution makes sense when oil prices have been cut in half over a few months.
However, what's really clear with these calls is that each person making the proclamation is relying on their historical experience and using that to predict what will happen in the future. Some are using more recent history, while others are going back further in time. That time frame reference really makes a difference, as it's the key to understanding what's fueling the debate over how quickly oil prices might recover.
BP CEO Bob Dudley. Source: BP Plc.
It's 1986 all over again
BP (BP -0.22%) CEO Bob Dudley is one of the more recent oil executives to give his opinion on the future price of oil. He's more bearish on oil prices than most other industry executives. He recently said in a Bloomberg interview that, "it will be a long time before we see $100 again." In fact, he sees $60 oil for as long as the next three years. That said, this isn't just a random guess; he's using a historical reference to frame his view. He said as much by suggesting that "the fundamental supply and demand does remind me of 1986 a bit, where we could go into a period in this decade of lower oil prices." In framing his view on what oil prices did in the late 1980s, he makes it clear that he sees no quick return to triple digit oil.
A return of the 1980s would be a worst case scenario for the U.S. oil industry. It was a time that derailed Texas' economy, led to a mountain of pink slips as the industry bled jobs, and sent shock waves into the banking and real estate markets. If an '80s style bust repeated, where oil prices remain low for years due to a gusher of massive new oil fields coming online, it would not only upend Texas' economy again, but it would also derail the economic boom hitting places like North Dakota, Oklahoma, and Colorado, all of which have seen surging oil production thanks to shale.
Holding out hope that it's a 21st century style crash
There is, however, another possible scenario that most other oil executives are pointing to, and that's one comparing last year's oil prices crash to what we saw earlier in this century, when oil prices crashed but then recovered. Halliburton (HAL 0.35%), for example, sees the recent crash following this more recent path. Its president Jeff Miller said that, "while history doesn't repeat, it sometimes rhymes." In this case he believes that the rhyme is of more recent vintage, as the current "trajectory is similar to both the 2001/2002 cycle and the 2008/2009 cycle." As we see on the next two charts, there was a rapid drop in the oil price due to weak economic demand brought on by a recession (in gray) followed by a fairly quick recovery.
Brent Crude Oil Spot Price data by YCharts
Brent Crude Oil Spot Price data by YCharts
In both cases oil companies rapidly cut back on investments, resulting in a dramatic drop in the number of drilling rigs in operation, which led to lower oil supplies hitting the market. This quick supply cut enabled the oil market to self-correct within a year or so.
While there's no global economic recession at the moment, overall demand for oil has been weaker than expected as Asian economies haven't been growing as quickly as projected while European economies remain weak. That said, most oil executives think, and probably are holding out hope, that the current downturn in the oil market is simply a repeat of 21st century style demand-weakness corrections.
This is why we see CEOs like Continental Resources' (CLR) Harold Hamm suggest that oil prices could rise sooner rather than later. He said that "the market does not appreciate how rapidly U.S. producers are reacting" to the price plunge by cutting back investments and reducing the rig count. These cuts will likely lead to U.S. oil production from key shale plays beginning to decline later this year. That said, Hamm is not calling for a return to $100 oil just yet, but that oil prices could get close to that level over the longer-term. He's also far from the only one pointing out the potential for oil prices to rally later this year, as most companies see more similarities to the 2000s than 1980s when looking at the recent downdraft because of how quickly production can be cut.
Investor takeaway
We'll continue to see a lot of headlines being made on where oil prices will go in the future. However, it is important to remember that each of these calls will be made using a historical reference point. Bearish calls will likely point back to an '80s style bust, while calls for a quicker recovery will be from those who see a repeat of the industry's most recent history. Of course, only time will tell who will be correct, but it is important to know why there are so many differing opinions on what oil prices will do in the future.
