ANZ Research's commodity strategist Victor Thianpiriya said key producers were battling for market share, creating an inelastic supply response to lower prices for both Brent and West Texas Intermediate crude.
"We think that WTI will trade down to below $US40/bbl over the next six months, before supply-side constraints start to be felt," he said.
With neither OPEC nor the US showing signs of blinking first, the bank expects oil production will flood the market before production is curbed significantly.
Shale operators in the US, on balance, seem to have only decreased production marginally since the decline in the oil price in 2014.
The industry in general has adjusted to lower prices by selling assets, paying down debt, hedging forward production, and importantly, becoming much more efficient.
"Many are knuckling down for a prolonged period of lower prices. So much so that overall production from key US shale fields has actually increased this year from 12.4 million barrels of oil per day in January (5.2 MMbbl of oil and 7.2MMboe of natural gas) to 12.7MMboe in October, according to EIA data," the bank said in yesterday's research note.
Production guidance for the next few months seems to confirm that there has been only a mild supply-side response from the producers thus far and production levels should remain very strong over the next quarter.
In particular the 10 largest independents in the US shale oil plays of the Bakken Shale, Eagle Ford Shale and the Permian basin slow limited scaling back of production.
"Despite pullbacks in capital expenditure in the low price environment, many of these companies have found significant efficiencies, enabling them to continue expanding production," ANZ said.
"The third quarter production updates due in October/November will give us more clues as to company plans going forward."
December's OPEC meeting should also offer an interesting data point.
Whatever happens around the cartel's board table, the supply/demand balance is expected to be in surplus for at least the next 18 months, ANZ said, with an oil surplus of 2.9MMbopd, the highest level since 1998.
The EIA believes the current oversupply is the widest the surplus will get.
"It is tempting to think that the worst for prices is behind us (but) while the surplus is still expected to persist through 2016, we think that more concrete signs that the market is balancing will be required before prices can stage a sustainable recovery," Thianpiriya said.
Sharp, rapid declines in prices may be less common going forward, but a slow grind lower should be expected.
Plans for concerted action to raise prices from OPEC, driven by Venezuela, are unlikely to result in a backdown, and Iran has up to 50MMbbl in storage to dump into the market as soon as it can.
Meanwhile, Goldman Sachs continues to roll out bearish predictions for oil prices. The latest from the investment bank is that oil prices could remain below $US50/bbl for 15 years, dipping as low as $US20/bbl.
