Bad news in the oil industry just keeps coming. Seven oil and gas producers have filed for bankruptcy so far in 2015, highlighting just how difficult it has been for the industry to cope with falling oil prices. But if these analysts are right, the turmoil in the oil patch could be just the beginning.
Analysts at Morgan Stanley have been pretty pessimistic about oil prices in 2015, comparing the recent slump to the some of the worst oil depressions of the past decades. But earlier this week, the company issued another warning to energy investors: it’s going to get much, much worse.
In a report to customers published on Thursday, July 23rd, analysts wrote that the current slump in the oil business will be “far worse than in 1986.”
“In that case, there would be little in analyzable history that could be a guide for what’s to come.”
In their report, Morgan Stanley actually highlighted some of the factors supporting energy prices.
First, low oil prices are stimulating demand. Cheap oil means larger vehicles, cheaper shipping, and more frequent road trips. Low energy prices are also discouraging businesses from drilling for new oil supplies, curtailing inventories.
Typically, this would put a bottom underneath oil prices. However, Morgan Stanley notes the huge surge in production from the Organization of the Petroleum Exporting Countries (OPEC). As you can see in the chart below, the cartel is ramping up output.
Furthermore, oil supplies outside of the U.S. may continue to increase as a nuclear deal between Iran and the international community has been reached. It’s likely that in a matter of a few months when sanctions are lifted, Iran’s crude will enter the market.
At the end, the report suggests that U.S. production could also rise again. That could push off a recovery in oil prices for another three or four years.