Many traders are waiting for oil prices to crash again, as a rally triggered by the falling value of the U.S. dollar fizzles. They could be waiting a long time.
“You could be at 50 or 60 [dollars per barrel] in 60 days," famed oil investor T. Boone Pickens tells Yahoo Finance in the video above. “Supply is down and demand is up and price is going to go with it.”
The price of West Texas crude bottomed out at around $26 per barrel in February and has since bounced back up to nearly $48. Oil got a recent bump from a Goldman Sachs (GS) report citing a surprisingly quick drawdown of oil stocks and raising its price forecast for crude to $50 for the second half of the year.
Goldman thinks the oil price will hit a ceiling around $50, as more supply comes on the market and the effect of temporary factors -- such as the sweeping fire in Canadian oil country – fades. But Pickens sees tighter supply in North America, in particular, which would push prices closer to his target of $60 – and do so quickly.
Pickens points out that the U.S. rig count – the tally of active wells – has plunged from around 1,600 toward the end of 2014, to fewer than 350 today. Conventional wisdom hold that drillers will turn those rigs right back on once prices go high enough to make them profitable. But Pickens says that won’t happen. “You’ll never go back to 1,600 rigs in the United States, he says. “They’ll cannibalize some of them, use parts off of them. You’re going to find the decline in supply is going to be fast.”
If Pickens is right, financial markets would probably cheer. Cheap energy is obviously a boon for consumers and businesses that are net purchasers of energy – which is most businesses. But oil prices fell so far, so fast during the last 18 months that it seemed to presage some kind of economic meltdown or at least a spate of bankruptcies and defaults in the energy sector. A sustained recovery in prices would stanch the bleeding in the energy industry and ease pressure on banks that have committed loans to many endangered producers.
It’s also possible that oil producers will crank up supply faster than Pickens expects, once again flooding the market and pushing prices down. Prices of $35 per barrel or less seem to be what investors worry about. For the time being, they seem to have a cushion to fall back on.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.