10 decisive oil forecasts for 2016

March 16, 2016 09:00 AM

Last year, 16 publicly traded US-levered oil and gas companies filed for bankruptcy protection. But half way through Q1 2016, crude oil prices have yet to correct — in fact, they’ve worsened, and a price floor has yet to materialize. The ensuing volatility we’re predicting based on the more than 50,000 energy-industry data points we track each day is set to be a boon for the directionally-inclined trader.

Here are Energy Capital Research Group’s 10 most important predictions for the year.

1 opec will not cut production, no matter what you hear

Heading into the commodity collapse, the mantra was “OPEC will cut.” But they didn’t; in fact they pumped and cut prices, and ever since the market has been jumping at any indication that the cartel would reverse course. 

That isn’t going to happen in 2016. The bulk of swing production within OPEC lies with Saudi Arabia, which kicked the price collapse into full swing by opting to let market forces grind out higher-cost producers on Thanksgiving 2014. These could be American producers (and have been to a degree — U.S. production is down about 500,000 barrels per day from peak production earlier last year), Russia or even financially constrained and higher-breakeven OPEC members. 

While weaker OPEC members are screaming for cuts, they can’t afford to make them themselves, and look to the Saudis to fulfill their traditional role. The Saudis were already struggling with partner nations that were unable or unwilling to comply with prior production quotas, essentially forcing the Kingdom to surrender petrodollars to its colleagues, and frustration with that dynamic presumably helped make its decision an easier pill to swallow. 

Russia, a critical part of any deal as the world’s largest non-OPEC producer, is finally beginning to signal that it is ready to talk, but it has a checkered past with production curtailment deals. And U.S. production is now showing stubborn resilience. If Saudi Arabia throws in the towel, it will not only have driven prices lower, but also surrendered market share to whichever nations do not cooperate in a reduction, most likely the U.S. and other non-OPEC countries, and also Iran, which would almost certainly insist on a pass given that sanctions against it have just been lifted.

2 china's slowdown could be worse than many think

A slowing China has been a major factor in pulling crude prices lower. A significant portion of global oil demand growth projections were keyed to China and global overproduction was previously expected to be quickly whittled away as that demand caught up. 

Instead, China grew at just 6.9% last year, the nation’s slowest growth rate since 1990, and below the government’s 7% target. China expects more slowing, targeting 6.5% GDP growth this year, but actual growth could be even slower with the integrity of Chinese government data often questionable and the potential for market sentiment and volatility to make a bad situation worse. From an oil demand perspective, China’s shift from manufacturing toward less energy-intensive service jobs is another negative. Meanwhile, crude product exports from China have been rising fairly aggressively, attaining an all-time record of 1.08 million barrels-per-day in November, further glutting the global hydrocarbon complex. Finally, China has been building out a large, 550-million-barrel strategic petroleum reserve, taking advantage of the recent collapse to bargain shop. China set record seasonal oil imports nearly every month of 2014, and did so again last year, with the most recent data showing inflows of 6.67 million BPD. 

Unfortunately, China’s crude absorption sponge may soon take a breather. Government data shows China had more than exceeded existing storage capacity as of mid-2015 as it added around 100 million barrels to its reserves over a 12-month period. The country expects to have another 
70 million barrels in new capacity online by 2016, and even that reduced volume of capacity may not be available as quickly as desired. 

China could push additional storage into existing private sector capacity, but this would interfere with domestic economic considerations, and again, China already has done this to a degree, so options to push these limits further could be constrained. Finally, some local industry sources have opined that China feels crude prices may stay lower for longer, so any rush to take advantage of fire sale pricing has been curtailed in any event.

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About the Author

Sean Levine is the Director of Research & Product Development at energycapitalresearchgroup.com, a Baltimore-based data analytics firm specializing in independent, short-term energy commodity and company-level analysis for institutional investors, traders and industry operators.