There is still very little clarity on the state of the oil markets, and the recent rally did nothing to dispel that fact. Still there is a bit of consensus around the notion that the rally will be short-lived.
Just a few short weeks ago it appeared that oil had hit bottom. After briefly dipping below $40 per barrel, speculators began taking more bullish positions on oil, and prices leveled off in the mid-$40s for the month of September. As more and more data trickled in, pointing to a sharper slowdown in U.S. oil production, markets grew more confident that the rebound had finally arrived.
Rig counts began contracting again, demand continued to rise, and credit redetermination periods raised the prospect of weak drillers being forced out of the market. Related: The End Of The Oil Major?
Then there were a few other outside forces that conspired to push up oil prices. Volatility in global currencies and financial markets, plus new concerns over the U.S. economy convinced the Fed to hold off on raising interest rates. The dollar weakened as a result, providing a bit of a lift to crude. To top it off, while Russian airstrikes in Syria didn’t cause prices to shoot up, the prospect of geopolitical conflict suddenly returned to oil markets after having been a nonfactor for more than a year.
After weeks of relative stability, oil prices shot up. On October 9, WTI jumped above $50 per barrel for the first time in nearly three months, and Brent traded above $53 per barrel. The rebound was here.
But the more than 10 percent gain in crude prices in just a few days was quickly seen as too much, too fast. Prices dropped back at the start of this week.
To be sure, supply and demand will continue to converge, and the balancing process is still playing out. However, several voices weighed in to remind everyone not to get ahead of themselves – it could still take another year or so to work through the glut in supplies.
In the IEA’s October report, it confirmed that global oil demand growth is at a five-year high, set to hit 1.8 million barrels per day (mb/d) in 2015. But growth will fall back closer to the long-term average of 1.2 mb/d next year. The “stimulus” in demand from low oil prices is “expected to fade next year,” the IEA concluded. Also, the IMF downgraded global economic growth by 0.2 percentage points for 2016. Slower demand growth, coupled with the impending increase in Iranian production following the removal of sanctions, “are likely to keep the market oversupplied through 2016.” The IEA thinks that non-OPEC supply could fall by 500,000 barrels per day in 2016.
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OPEC also threw cold water on the oil price rally when it published new figures this week in its own monthly report for October. Sure, non-OPEC production is declining, especially in the U.S., but those declines are being offset by higher OPEC production. The oil cartel boosted output by 109,000 barrels per day in September. Iraq alone added 80,000 barrels per day.
The U.S. EIA largely agrees with these estimates. It predicts U.S. output will fall to an average of 8.9 mb/d in 2016, down from 9.2 mb/d this year. But the glut will take time to abate. The EIA thinks that WTI will average just $53.57 per barrel in 2016, with Brent averaging $58.57.
All three of these energy bodies see the oil glut persisting into 2016, potentially taking another year for oil markets to balance out. All agree that the balancing will come on the back of falling U.S. production and higher global demand. OPEC sounded the most bullish, choosing to emphasize the growing demand for its oil next year as its competitors lose ground. “Required OPEC crude in 2016 is expected to average 30.8 mb/d, with the second half of the year reaching as high as 31.4 mb/d, resulting in more balanced oil market fundamentals,” OPEC concluded. Related: Can The Oil Industry Really Handle This Much Debt?
While these agencies are focused on 2016, private analysts see trouble ahead in the short-run. Goldman Sachs saw the recent rally as an overreaction to the growing likelihood that the Fed could delay a decision on interest rates. Even though “a Fed on hold could offer some reprieve to the emerging market rebalancing, this decision would ultimately be driven by weaker underlying activity, leaving risks to oil demand and our forecast skewed to the downside,” Goldman analyst Jeffrey Currie wrote in a recent note. “Net, we expect this rally to reverse and reiterate our forecast for lower prices for longer.”
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Ed Morse at Citigroup agrees. “I think we are not at the bottom because we are still seeing consistent cost deflation,” Morse said over the weekend at a conference in Peru held by the Institute of International Finance.
All of these predictions need to be taken with a very large grain of salt. And while all of them have some differences on where oil prices are heading in 2016, all of them seem to agree that there won’t be large price gains in the near-term.
By Nick Cunningham of Oilprice.com
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