Oil markets began the 2020s by nosediving below $0 a barrel for the first time. Investors and analysts are now trying to work out what the rest of the decade holds in store.
Some think the bust will set in motion a boom, predicting that investment in oil-and-gas production will dry up and propel crude prices back above $100 a barrel.
“That funding pressure is going to be massive. It’s going to be really difficult for some of the producers to produce,” said Trevor Woods, chief investment officer of Ohio-based hedge fund Northern Trace Capital. “We could hit $150 pretty easily by 2025.”
Others say the pandemic will sap fuel demand after the threat of contracting coronavirus has faded, cementing an era of cheap oil.
The debate over the long-term direction of the world’s most important energy source is thorny. Oil markets have dozens of moving parts, making them hard to forecast.
In the long run, most analysts agree prices should gravitate to a level at which energy producers profit from making just enough crude to match demand. Covid-19 has made that calculation more complex. Investors are unsure whether the pandemic will permanently alter transport and consumption patterns, or expedite the move toward cleaner energy sources.
Oil prices staged a quick recovery after turning negative in late April, boosted by a pickup in China’s economy as well as output cuts by the Organization of the Petroleum Exporting Countries, Russia and producers in North America. The rally has stalled since new coronavirus cases threatened to hit fuel demand in Southern and Western U.S. states. West Texas Intermediate futures, the benchmark in U.S. oil markets, have traded at around $40 a barrel since late June.
The case for soaring prices rests on asset managers and banks declining to bankroll necessary investments in new and existing oil wells, leading to a shortfall of crude.
Oil companies have already slashed spending plans, seeking to shore up their balance sheets in response to the drop in revenue caused by the pandemic. Exxon Mobil Corp., which last week warned of big losses in its second-quarter earnings, has said it plans to reduce capital spending in 2020 by $10 billion, or 30%.
European majors are also responding to pressure from investors to reduce their carbon footprint. BP PLC cut its investment plans by 25% to $12 billion and is reviewing whether to develop oil-and-gas fields it hasn’t fully tapped.
All told, investment in upstream oil-and-gas assets is expected to slump 32% this year to $328.4 billion, the International Energy Agency said in May, the biggest decline in at least 10 years.
This belt tightening will have a lasting impact on the world’s ability to produce oil, said Christyan Malek, an analyst at JPMorgan. He estimates that five million barrels a day—or roughly 5% of pre-Covid-19 levels—will be lost, and that an additional $625 billion will need to be invested by 2030 for production to catch up with demand.
Prices will rise higher than they did in the past to incentivize new oil output, according to Mr. Malek. That is partly because investors are telling energy companies to drill for higher-quality crude and cut methane emissions, raising production costs.
“Could we see oil move to $100 over the next two years?” Mr. Malek said. “Absolutely.”
Richard Fullarton, chief investment officer of London-based investment fund Matilda Capital Management, said he expects the price of oil to vault above $100 a barrel in the second half of the 2020s.
“We’re never going to physically run out of oil,” he said. “It’s whether we’re going to deploy the capital to access that oil.”
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Such predictions are at odds with the futures market, which pegs Brent crude at less than $60 a barrel for the rest of the decade. The market is overestimating the speed at which the world will move away from fossil fuels, said Mr. Woods of Northern Trace. He agrees that prices will surge, possibly surpassing Brent’s 2008 peak of $148, to spur producers in the U.S. shale patch and elsewhere to bring oil out of the ground fast enough.
A transition to green energy sources such as wind and solar is “fully bought into by business leaders, but outside the [European Union] there is extremely slow policy implementation,” said Mr. Woods. “So fossil-fuel use is going to continue to grow.”
For others, a return to $100 oil is fantastical.
Producers will be able to pump more than enough oil at $50 a barrel, according to Citigroup analyst Edward Morse. His rationale: Technological improvements have lowered production costs, while the pandemic will encourage people to keep working from home and taking fewer flights, crimping oil demand.
OPEC could also keep a lid on the market, according to Martijn Rats, an analyst at Morgan Stanley. When peak oil demand comes into sight, Saudi Arabia and other low-cost producers may turn on the spigots to claim greater market share rather than bolster prices, he said.
“We know from the experience in March and April that when OPEC and Russia turn on the taps we’re not going to go back to 60 bucks,” Mr. Rats said. “They made their point.”
Write to Joe Wallace at Joe.Wallace@wsj.com
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