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Oil prices will slowly rebound, energy analysts predict

Oil prices will gradually rebound over the next several years as the global surplus slowly gets used up, according to a forecast released on Tuesday.

Deloitte report forecasts $80 US by 2022 as global glut shrinks

There's an oil price rebound on the horizon, according to analysts at Deloitte. (Hasan Jamali/Associated Press)

Oil prices will gradually rebound over the next several years as the global surplus slowly gets used up, according to a forecast released on Tuesday.

The analysis by Deloitte's resource evaluation and advisory team predicts the price of West Texas Intermediate (WTI) crude will average $44 US this year, climbing to $55 US by 2018, $70 US by 2020 and $80 US by 2022.

"Our view is that the market has reached a relative bottom and the trend for the next number of months will be a shallow but rocky upward slope as certainty increases in the global ability to chew through oversupply in the coming months and years," the report says.

The report's authors are "cautiously optimistic" that the energy industry is entering a recovery phase, in part because the U.S. repealed its ban on crude oil exports at the end of last year, a change they say could transform the market.

"This has the potential to offer companies another market for their oil and may relieve some pressure on the U.S. crude stockpiles, which are currently at all-time highs," the report says.

Judith Dwarkin, chief economist with RS Energy Group, says her firm is expecting an average for prices a little lower than Deloitte's predictions for this year, but in the same ballpark.

"I don't think they're saying anything spectacularly out of consensus," she said.

Dwarkin says she agrees with Deloitte's forecast of a price rebound towards the end of the decade.

Part of the equation will be continued growth of demand in developing economies in Asia, she said.

"Demand has grown at a very respectable and steady pace, averaging over a million barrels per day per year for the last 15 years or so. And that's helping. But when your supply overhang is a million and a half or more, that's not enough," she said.

"It's a recovery, but it's not like your grandfather's oil price recovery."

U.S. drilling slowing down

Drilling activity in the U.S. has slowed by about half-a-million barrels per day since last summer, which is also starting to alleviate global oversupply, the Deloitte forecast says. 

"Globally, demand continues to lag supply, but renewed OPEC production freeze talks and recent boosts in crude imports to Asia offer positive signs that this surplus is beginning to shrink," the report says.

The Deloitte analysts also say the dramatic downsizing and restructuring being done by energy companies will pay off in the long run.

"Market stability is beginning to drive increased merger and acquisition activity that will cause drastic changes to the oil business globally as companies come to grips with debt and balance sheet damages inflicted throughout the past 18 months," the report says.

"It is still a difficult market to turn a profit, but companies have made operational adjustments in recent months to achieve positive cash flow. Locally, a number of companies in industry have talked about operating and capital cost reductions as the mechanism that will allow them to maintain operations in the low commodity price environment." 

Andrew Botterill, one of the report's authors, said his group is less optimistic about a turnaround in the gas sector.

"Natural gas has taken quite a hit here in the last six months. We had an extremely warm winter, as we're feeling right now. And storage levels are at five-year highs," he said. 

Read the report here. 

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