Yet U.S. production has proven to be remarkably resilient, slowing only modestly from a mid-year 2015 peak as continued technological advances have lowered break-even prices for new wells. Companies have also become more efficient in their use of capital by cutting expenses and developing lower-cost, higher-margin wells. Input costs such as fuel have also moved lower, in addition to oil services companies reducing their rates to incentivize producers to keep exploration and production E&P activity high.
Where does it go from here? Our base-case scenario for oil prices, shown below, lays out the route we expect the commodity to follow over the next few years, from working through the current glut (normalization), to an inflection point between supply and demand (rebalancing), to a return to sustainably higher prices as supply struggles to keep up with growing demand (tightening).
Nick Koutsoftas is portfolio manager of commodities strategy for Cohen & Steers.