The price of oil is already very high by historical standards, with Brent staying above $100 per barrel because of tensions in the Middle East and uncertainties created by the Arab Spring, Tom Pugh, commodities analyst at Capital Economics, said.
But growing supply and relatively slow demand is likely to push oil prices lower over the next five to 10 years, he wrote in a market note.
“We think Brent is heading back to $70 per barrel by 2020,” he said.
On the supply side, over two million barrels per day of crude is constrained at the moment by unrest in Libya and the sanctions that have been imposed on Iran, and there is still a big premium in prices because of the threat of more disruptions to supplies from the Middle East, he said.
A resolution of some of these problems could “boost supplies considerably.” The analysts at Capital Economics believe the price of Brent crude will fall to $90 by the end of next year.
Their forecast is much lower than that of analysts at Societe Generale, who said the price of Brent oil was likely to increase to $110 next year.
On the demand side, the Capital Economics team expect the recovery to be subdued, with advanced countries such as the eurozone and Japan victims of “fundamental weaknesses” and emerging markets such as China having to face “structural slowdowns.”
“Indeed, it will be hard to sustain the recovery unless oil prices do fall back,” Pugh said.
Another factor that is likely to push down demand for crude is consumers’ ability to diversify away from oil to other forms of energy like natural gas or electricity.
Pugh noted that in the US a number of truck and train companies were already looking into how to substitute their consumption of diesel with gas, as gas prices plummeted due to the shale gas revolution in North America.
“So far the US is the only country to have developed its shale reserves on a significant scale,” he wrote.
“But a number of countries, especially China and Russia, have the potential to be producing major amounts of shale oil and/or gas by 2020.”
There are also other forms of unconventional oil production, from Canadian oil sands and Arctic oil fields to Brazilian pre-salt – located in the Brazilian continental shelf and about which some experts said that it contains 50 billion barrels of oil, four times the current reserves of the country.
These are “likely to be producing substantial amounts of oil by 2020,” Pugh said.