Syed Rashid Husain
The global energy landscape has changed significantly – and for good – some insist. Gloom continues to hover over the crude markets as New Year began. Both the Brent and WTI futures finished 2015 down by more than 30 percent, as glut continued to haunt the markets. And 2016 may not be too different!
How low could crude go further – in 2016? Pundits seem divided.
Goldman Sachs has been betting on $20 oil for some time now. A few others seem to be joining in the chorus. Again Capital founding partner John Kilduff now says US crude oil could fall to as low as $18 per barrel in 2016. "I think it's going to have to get that painful for the global industry to finally respond and that includes Saudi Arabia, OPEC and Russia," he told CNBC's " Closing Bell," on Thursday.
“We believe that the weakness in crude oil prices reflects a combination of fundamental factors and financial flows. Fundamentally, there is simply too much oil,” states Canada’s Bank of Montreal. The supply-demand imbalance could force oil down an uncontrollable chute, such that prices could “drop to $25, $20 or even $15, as some aggressive put buyers are speculating,” it added.
Trader Steve Grasso, Stuart Frankel's Director of Institutional Sales too isn't ruling out $20 oil. "I think everyone who is looking at oil now, they should think about $20s. They should think about maybe even the teens because at $110 no one thought it was going to trade at $80," he said.
“Headwinds (are) growing for 2016 oil,” Morgan Stanley said in its outlook for 2016. “The hope for a rebalancing in 2016 continues to suffer serious setbacks,” the bank added.
Tom Kloza, founder and global head of energy analysis at Oil Price Information Service, too is offering a pretty dour outlook. But he doesn’t expect the market to hit $20 a barrel. Yet even he thinks, the outlook for crude as “very much a slog” for 2016. Kloza is predicting the WTI to hit $32 a barrel this year. “I think next year is very similar to this year and I think there’s good chance oil is going back to numbers reached back in December 2008,” Kloza told MarketWatch.
However, he doesn’t totally rule out further weakening of the crude markets. “I would think that we are going to retest the lows…the market will be most severely tested in February, March and April when we get Iranian crude and we have refinery maintenance,” Kloza emphasized. “On balance, about $5 lower on average in 2016 than 2015 so very, very much a slog,” he concluded.
Others too are not far off.
The first half of 2016 is looking "pretty ugly" for hammered oil prices that are poised for even more losses, John Kingston of McGraw Hill Financial Global Institute's told the press last Thursday. While some recovery in prices - perhaps at $60 a barrel - may take place at the end of 2016, "You would hit a price in the 20s before you would certainly get there, Kingston added.
“The party is over, at least for the next two to three years,” said Oystein Berentsen, of Strong Petroleum in Singapore pointed out.
There are indeed reasons for this gloom.
After dropping down from the peak of 9.6 million bpd in April to 9.1 million bpd, US crude production reportedly rose by 23,000 barrels a day last week to 9.2 million barrels a day. “Production is up again, it’s defying all odds,” said Dominick Chirichella, analyst at the Energy Management Institute. “We still just have a robust amount of supply. [...] I just don’t see anything that excites me to want to buy the market.”
Crude supplies in Cushing, Okla., a key storage hub and the delivery point for Nymex futures, rose to 63 million barrels, a record in weekly data going back to April 2004. Concerns earlier in the year that Cushing could run out of room to store oil is also now weighing heavily on prices.
US crude inventories too rose by 2.6 million barrels in the week ended Dec. 25, the US Energy Information Administration said. Last month, the United States also took a historic move in repealing a 40-year ban on US crude exports to countries outside Canada, acknowledging the industry’s growth.
In the meantime, Russia’s oil output is touched a post-Soviet record of 10.86 million bpd last week. Russia’s December output was boosted by the OAO Novatek-led Yargeo venture’s Yarudeyskoye field, which started producing on the first day of the month. Output from the deposit will rapidly reach 70,000 barrels a day, the company said Dec. 1.
A new tax regime in Russia could pave the way to a further increase in oil production from fields in Western Siberia, the Russian energy minister is now asserting. Energy Minister Alexander Novak said oil production in Western Siberia, once a major contributor to overall output, was declining at an average rate of around 1 percent per year. Changes in a tax system, where so-called excess profits will be taxed at 70 percent, will make Western Siberia commercially viable. Under the current tax regime, Novak said about 73 billion barrels of oil are not economic.
"Changes in the tax system are to create conditions to make production of this oil commercially viable," he said in an interview.
While most OPEC members continue to produce at elevated levels, Iran too is gearing up to flood the market with 500,000 bpd within weeks of sanctions being lifted while the ceasefire in Libya may also add extra barrels, writes Ole Hansen, head of Commodity Strategy, Saxo Bank.
And global economy is not in the best of the health too, dampening the demand growth scenario. IMF chief Christine Lagarde is now asserting that global economic growth would be "disappointing" in 2016, with the prospect of rising US interest rates and a slowdown in China contributing to a higher risk of vulnerability.
Weak data from major oil buyers China and Japan is also contributing to market woes. Chinese industrial profits reportedly declined 1.4 percent in November, and in Japan, industrial production fell 1.0 percent in November from a month earlier. This was a considerable bigger slowdown than expected.
Brimming oil inventories in Europe is a cause of concern to the market too. ” Bjarne Schieldrop, chief commodity analyst at SEB in Oslo, believes, “oil inventories in Asia are going to get closer to saturation in the first quarter.”
Saudi oil movers and shakers are hence realistic. Khalid Al-Falih, Saudi Aramco chairman is not anticipating any immediate rebalancing of the markets in 2016. “Supply has plateaued in North America and (is) declining by significant amounts. We expect that to continue and perhaps accelerate in 2016,” he said, stressing that crude oil markets are likely to balance, but only “some time in 2016.”
Some hope is still lingering – it seems!
