The Eventual ReboundThere is growing recognition that cheap ($40 a barrel), plentiful oil is not going to last forever, and when the price rebound comes, it could be violent. A Merrill Lynch research report released last week notes that un-replaced oil depletion could result in a cumulative decline of global oil production on the order of 30 million b/d by 2015.

In the immediate future, Oppenheimer analysts see a combination of OPEC supply cuts, falling investment in new production, and an economic recovery leading to a big increase in oil prices.

The analysts note that oil companies will lose 40 percent of their cash flow this year and that 80-90 percent of new investment goes to offset depletion. This will lead shortly to a situation where investments will not be keeping pace with depletion.

OPEC cuts, falling non-OPEC production and the lack of investment could lead to a situation where global production is 6 million b/d lower by the end of the year. It is problematic whether global demand will have fallen by this much.

There are so many unknowns in this situation that it is difficult to say when prices will rebound, and whether an improvement in the economic situation will have to happen before the increase. We have learned in the last year that oil prices are very sensitive to over- and under-supply so that rapid rises and falls in price will likely occur as soon as market conditions shift.  

Henry Groppe, who has been forecasting oil prices for over 50 years, and mroe accurately than most analysts, sees crude prices doubling before year’s end. He believes that a 2 million b/d cut in OPEC production, a 4 million b/d increase in demand from very low oil prices, and a 1.2 million b/d cut in consumption from the economic slump will combine and net out to cause shortages.