An analyst has warned that oil prices could still fall to $20 per barrel within the next year — despite rising sentiment that the battered market could be starting to balance.
Paul Jackson, head of research at exchange-traded-fund provider Source, told City A.M. oil bottoming at around $20 after a bubble is part of a "historical cycle that repeats itself".
He believes the black stuff must fall below the marginal cost of production — the level needed for drillers to keep their pre-existing projects open — before output cuts which will eventually boost prices start to happen.
"Oil at $30 didn't get output to stop ... it needs to get down to $20 so a sufficient number of producers cut back," Jackson added. His prediction is based on an analysis of West Texas Intermediate crude's performance since 1870.
Goldman Sachs said late last year oil prices could fall to $20 if storage tanks reach their limit, while Morgan Stanley subsequently warned that crude could fall to this level due to foreign exchange rate movements.
Oil prices fell below $28 in January, but they've since risen to hover around $48. This has been fuelled by rising demand, waning US oil stocks as well as unexpected supply outages in countries such as Canada and Nigeria.
Goldman Sachs recently upgraded its forecasts for US oil prices in the second half of this year, but cut its estimates for the first quarter of 2017. Citigroup also raised its forecast for WTI from $39 to $42 this year.
Jackson said that "if [the oil] price is going up ... there is quite naturally a tendency for forecasts to follow."