Antoine Halff testified before the US Senate Committee on Energy and Natural Resources at a hearing to examine the near-term outlook for energy and commodity markets. His conclusion is below and the full written remarks can be found here (PDF).


Conclusion: A new era of heightened volatility?

In summary, the oil market is facing unprecedented headwinds, which have resulted in steep and, for the industry, highly challenging price declines. While supply growth is already slowing in the face of shale oil setbacks, oversupply and inventory builds continue amid relatively sluggish demand growth. Downward pressures on oil prices will persist until the market reaches an inflection point and inventories decline.

But the factors that today incentivize producers to boost output at the expense of longer-term investment will inevitably undermine future production. The very rise of the shale oil industry, with its unique cost structure and short business cycle, undermines longer-term investment in high-cost conventional supply. The ability of the shale industry to ramp back production in a rebound is untested, however, and the market might find out when prices finally recover that its capacity has been durably degraded. In a best-case scenario, the market ought to brace itself for a period of heightened volatility, albeit perhaps in a relatively narrow band, if the shale oil industry manages to function as an effective swing producer. Alternatively, low prices today may set the stage for significant supply shortfalls tomorrow.