Continuing volatility in the oil market has seen crude prices hitting new lows. With supply continuing to exceed demand and little signs of a cut in production, some analysts suggest prices could fall as low as $20 per barrel during 2016.
A wide range of factors are in play, so it is difficult to anticipate the direction of the oil market. However, there are some ‘known unknowns’ likely to have an impact:
- The return of Iran to the international market: With Iran refusing to even discuss any limits on production, supply could be boosted by as much as a million barrels per day by the second quarter of 2016.
- The US recommencing exports of crude: Analysts expect overall US crude output to continue its recent decline in 2016. However, the lifting of the 40-year-old US ban on crude exports could increase supply to global markets.
- Geopolitical uncertainty in Iraq: Continuing instability in the region means that Iraq’s likely contribution to global supply is unclear.
- Indonesia’s return to the OPEC fold: Indonesia produces just about 850,000 barrels of oil per day; half of what it consumes, and has in recent times become a net importer. Despite the country only producing a fraction of the 30 million barrels a day that OPEC members collectively pump, analysts believe the country’s return will have to be factored into the group’s production ceiling.
- Continuing low prices pose a threat: With margins being squeezed over a prolonged period many businesses, particularly in the Exploration & Production and Oil Services subsectors, may be in danger of filing for bankruptcy protection, possibly get taken over, running out of cash; the possibilities are numerous, adding to the uncertainty. The implications for the economy of Venezuela, which depends on oil for around 95% of its export earnings and has seen revenues cut by up to half, are equally serious; its economy could implode if prices remain low indefinitely.
- Demand in emerging markets: Volatility in the Chinese economy in 2015 saw less growth in demand from China than expected, although India’s appetite for oil continued to surge. Resurgence in Chinese demand could create a consequent upward pressure on global prices.
With OPEC refusing to fix output, US producers are reacting by decreasing production levels; however the short term prognosis is ongoing oversupply and continuing downward pressure on prices. Most analysts expect a reversal in the second half of the year as supply and demand begin to rebalance. However, investors need to keep a close eye on the “known unknowns” as well as other macroeconomic factors.
For a more in-depth view read our article "The Outlook for the Global Energy Sector in 2016”, or for detail on our individual regions view our recent series of three webinars which covered the US, EMEA and APAC regions respectively.
 Source: S&P Global Market Intelligence “Global Energy Webinar - Outlook and Credit Risk Trends for the EMEA Petroleum Sector”, November 3, 2015