Oil markets remain oversupplied and prices are hovering in the range of $40-$50 per barrel. Many traders and industry experts, however, feel that the worst is yet to come and prices could fall further. In fact, Goldman Sachs is predicting that the persisting supply glut in global oil market is set to get even worse and oil prices could fall to as low as $20 per barrel in the coming months.
Amid all the speculation and market forecasts, there are still some voices in the industry that remain bullish on oil in 2016. One of them is Barclays, which came up with a bullish report that predicts the oil price to increase to $60 a barrel by 2016.
Barclays is bullish on oil
Barclays is one of the very few financial institutions that is actually predicting oil prices to increase in 2016 despite the recent slump and worsening supply glut. As per Barclay’s corporate banking team, oil prices would increase mostly because of doubling of global oil demand growth from 2.1 million barrels a day to almost 4 million barrels a day.
"There is no doubt that the UK North Sea oil and gas industry is under pressure right now but we do feel that signs of relief are there, and the forecast for $60 oil in 2016 with oil demand growth above trend again is encouraging," said the head of Barclay’s Corporate banking team. This prediction made by Barclays in is sharp contrast to the recent Oil Market Report by IEA, which predicts the global oil demand to slow down from the current 2.1 million barrels per day to just 1.2 million barrels a day by 2016. Related: Shale Gas Rig Count Could Implode Here If Prices Don’t Rebound
The IEA reports that, although there has been some increase in the demand for oil in countries like India, the massive crude oil production by OPEC and Russia have offset this demand growth. On the other hand, Barclays states that OPEC is no longer a major influencer for supply as its spare capacity has reduced from 14-16 percent of total global oil demand in 1980s to the current 4 percent of total demand.
Barclays thinks that although OPEC had decided to not reduce its production levels in November 2014, global oil demand growth actually tripled to almost 2.1 million barrels a day during the same time. Although the bank believes that the oversupply of crude would still persist in 2016, the sustained growth in the global oil demand rate would push the oil prices up from the current levels.
U.S. Shale can be a game changer, Barclays says
By producing around 11.6 million barrels per day in 2014, the United States overtook Saudi Arabia (which had a production of 11.5 million barrels per day) as the world’s biggest producer of crude oil in 2014. Barclays says in its report that U.S. shale industry could be a game changer as it has become the new swing producer, leaving behind its arch rival Saudi Arabia. Related: Big Oil: Which Are The Top 10 Biggest Oil Companies?
Barclays believes that U.S. shale was more reactive to oil price swings and was more capable of ‘adjusting’ its production accordingly. The bank further predicts a fall in U.S. shale supply in fourth quarter of 2015 and first quarter of 2016, thereby helping oil prices to move up.
What can we expect next year?
There was a quick jump in crude oil futures on Tuesday as Saudi Arabia ‘pledged’ that it would co-operate with OPEC and non-OPEC member to stabilize the prices. Does this mean that the oil kingdom is preparing for a cut-back in its production? As reported earlier, IMF has predicted that Saudi Arabia could face an economic breakdown in the next five years if it pursues its ‘high production strategy’.
The same applies for U.S. shale drillers who suffer from high breakeven costs. In case OPEC decides to reduce its production levels in its next meeting on December 4, we can expect a sharp jump in oil prices. Whether OPEC decides to reduce, increase or maintain its production levels, one thing is certain: Oil prices would be largely dominated by the balance of supply and demand in 2016 rather than mere speculations and market sentiments. So all eyes should be on these fundamentals. If oil supplies from OPEC and U.S. shale reduce in the coming time and demand from countries like India (whose oil demand has already witnessed a 10 year high in September 2015 as per IEA) remain strong, the ‘3 billion barrel oil cushion’ could deflate and this could make the oil prices head north.
By Gaurav Agnihotri of Oilprice.com
More Top Reads From Oilprice.com:
- U.S. Failing To Harness Hydro Power Potential
- Will Low Oil Prices Increase Internal Instability In Conflict Countries?
- Glencore Wades Into Libyan Oil Fight