Oil price headed for $30, says GMO

Oil price headed for $30, says GMO

The oil price is likely to fall to around $30 to $50 per barrel in the short term, argues GMO investment market analyst Jeremy Grantham.

In a GMO 2014 quarterly letter, Mr Grantham said a further price drop is likely, and such declines may induce global financial problems.

“Oil company bankruptcy might destabilise the financial world,” said Mr Grantham. 

“The economic pain from the lower oil price [in] Venezuela, Iran, Nigeria, Libya, Russia, or the Gulf States might set off regional political disturbances or provoke some rash action.

“Their debt problems combined with those of overleveraged oil sector companies might set off global financial problems. 

“Saudi Arabia, which loves stability much more than most, may come to regret not having sucked up the pain of selling less for a few years,” he said. 

According to Mr Grantham, the explanation of a decline in prices is uncomplicated. 

“A wave of new US fracking oil could be seen to be overtaking the modestly growing global oil demand.

“[There has been] an unprecedented and largely unexpected series of increases in US fracking production combined with a refusal on the part of OPEC to cut back.

“Clearly, though, global oil demand was not growing fast enough to absorb the new US fracking increases indefinitely. 

“We were rapidly approaching a binary choice: either OPEC, particularly Saudi Arabia, would decide to lower its production or the oil price would break. 

“Under [current] glut conditions, oil (and natural gas) is uniquely sensitive to declines toward marginal cost (ignoring sunk costs), which can approach a few dollars a barrel – the cost of just pumping the oil,” Mr Grantham said.

At the time of writing yesterday Brent crude oil was trading at US$57.80.


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