From $35 per barrel to $130 per barrel—this is the range for oil prices in the next few years that we could see, according to a commodity trading group. And it will all depend on what peaks first: demand or investment in new production.

"You could see spikes to even higher than $100 a barrel, even $130, and you could also see it go down to $35 a barrel for periods of time going forward," William Reed II, chief executive of Castleton Commodities International, said at the FT Global Commodities Summit this week, as quoted by Reuters. "The question is what happens first. Peak demand or peak investment?"

This is a fascinating question that will likely remain open for quite some time; it seems as if forecasts are even more unreliable than usual in the post-pandemic world. For instance, last year, energy authorities and the industry itself predicted oil demand growth was over thanks to the pandemic that encouraged a doubling down on an energy shift away from fossil fuels. Now, these same forecasters, including the International Energy Agency and BP, are talking about growing oil demand.

One thing that can hardly be disputed is that lower spending on exploration would inevitably lead to lower production. This is what we have seen: the pandemic forced virtually everyone in the oil industry to slash their spending plans. This is what normally happens during the trough phase of an industry cycle.

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What doesn't normally happen in a usual cycle is long-term planning for smaller output. Yet this is the response of Big Oil to the push to go green. Most supermajors are planning changes that would effectively reduce their production of oil and gas. In Shell's case, it has been literally ordered by a Dutch court to shrink its production of oil and gas.

So, it's pretty clear that supply is tightening, and oil prices are reflecting this. In fact, supply has lately shrunk so much that even the International Energy Agency, which earlier this year called for a suspension of all new oil and gas exploration, is now calling for more supply. This is the perfect illustration of how difficult it has become to predict where oil prices would go even in the short term, let alone a period of several years.

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According to Castleton's Reed, the recovery in oil prices was only to be expected. In that, he is the latest in the growing choir of voices predicting higher prices, even north of $100 per barrel, before too long. Yet, according to some, they might only stay there for a short while and then never reach the same levels.

Earlier this month, a Boston Consulting Group report titled The Last Oil Price Boom May Be in Sight suggested that what we are now witnessing may be not just the last oil price rally but the shortest one, too. The consultancy noted the fast rally in prices since the start of this year as an indication of the "compressed time span" of the boom.

"This quick rise will put pressure on suppliers, which will expand capex to meet rising demand, and end users, which will leverage efficiency as well as increasingly available new technologies to mitigate—or even avoid altogether—the price of oil and its attendant emissions," Boston Consulting Group's report authors wrote.

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Things in oil prices are indeed moving faster than usual, but if we are being fair, the past year has been anything but usual. The biggest consequence of the pandemic was a boom in uncertainty, which has made forecasting anything much more difficult than before. As noted above, oil demand forecasts are a good example of this heightened uncertainty. There are also challenges that the energy transition push is facing that could derail it or at the very least postpone it. This contributes to the uncertain future of oil prices and the argument for supervolatility.

Solar panel prices are on the rise, for instance. The reason is supply chain disruptions caused by the pandemic. There is also emerging environmentalist opposition to utility-scale solar farms. Issues such s copper supply for windmills and EVs, and battery minerals are also dimming the outlook for the energy transition and implicitly work in favor of oil and gas.

So, it is easy to see how Brent crude could hit $100 per barrel before this year's end if demand continues recovering at the current rate. Even the additional OPEC+ supply coming to markets next month may not be enough to reverse the trend.

It is a little harder to see oil falling to $35 a barrel unless a lot more supply is added. This would be a perfectly realistic scenario in any other cycle. Now, producers both in OPEC and outside it are wary of the energy transition and its expected effect on their business, and are not in a rush to boost production. The question of what will come first, peak demand or peak investment, remains open.

By Irina Slav for Oilprice.com

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