Oil prices are likely to remain between US$50 and US$60 per barrel for the next two years, according to a Natixis cross-expertise study.

The scenario predicts a stabilisation of oil prices by year-end, with low demand and excess supply maintaining downward pressure on the price. “Lower oil prices get transferred to the prices for the consumers, who tend to spend far more. US demand for oil products is up 4% in the first two months already,” says Abhishek Deshpande, lead oil analyst at Natixis. However, the research also says that factors like China’s growth strategy and environmental policies in the EU and US, by curbing the share of oil on global energy consumption, will keep demand for oil weak.

On the supply side, according to Deshpande, in the next two to three years oil will remain oversupplied: “Non-OPEC producers have become a much more important contributor towards the global supply in the market, and OPEC is no longer the only determining factor. In fact, the US is a swing producer. As long as that is the case, and as long as shale oil production continues to be quite strong, the chances are that prices are not going to go back to the level we saw a year ago. We will be in a close enough bracket of under US$50-US$75 for the next three years.”

No matter where you sit in the oil cycle, you will feel the pain. Alain Parent, Natixis

Under pressure from Saudi Arabia, OPEC vowed last December not to cut production, in an effort to defend the oil cartel’s market share. According to Deshpande, OPEC members will have to co-operate more to form a united front against non-OPEC producers in terms of regulating supply and influencing prices. “Countries like Saudi Arabia can keep production at this level probably for a year or two, but with Iranian oil back online and Iraqi oil not being disrupted, continuing to rise to 200,000 barrels per day year on year, we are likely to see a lot more pressure on OPEC to work together as a cartel,” says Deshpande.

According to Alain Parent, equity analyst at Natixis, low oil prices will have a profound effect on the industry: “No matter where you sit in the oil cycle, you will feel the pain,” he says. Oil companies have already been heavily affected by lower price, and are trying to reduce costs by laying off employees, trying to sell assets and cutting costly explorations.

Mergers and acquisitions (M&As) are also an option: “We will see more defensive M&As between companies struggling for survival, trying to buy time,” says Parent. More opportunistic M&As are also likely to occur, such as the purchase of BG Group by Royal Dutch Shell for US$70bn, announced this morning (April 8).

Another way to save costs, says Parent, is for oil companies to improve co-operation between different departments, and with oil service providers: “The oil industry has to re-invent itself. There is a hierarchy between the oil and gas companies and the services providers. Working more closely together would be a way to save costs.”