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Tough Times Still Ahead

Six factors suggest the oil price will remain low in 2016.
This article appeared in Vol. 13, No. 1 - 2016

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Oil prices fell markedly in December and still further in January, dropping below $30/barrel for a short time. The average Brent 2015 price was $54/barrel and it is expected to be lower in 2016, influenced by six factors which will add to the current supply glut and postpone the time at which the market might be expected to balance.

1. OPEC: No new target – no new strategy: At OPEC’s meeting in December the cartel completely dropped a new quota, citing the uncertainties surrounding Iran’s future production volumes. Collaboration appears to be failing. There is political disagreement over how the quota should be distributed among member countries and Saudi Arabia is not yet happy with the results of the strategy change. The lack of a quota means low oil prices for longer, as OPEC floods the market with cheap oil to squeeze out more expensive producers.

  • Overall cost to produce a barrel of oil in different countries. (Source: CNN Money and Rystad Energy)

  • Who to blame for the current oil glut - OPEC or Non-OPEC producers. (Source: IEA and Nordea Markets)

2. The US Federal Reserve increased rates: The US hiked interest rates for the first time in almost a decade at the end of 2015, indicating that rates will rise further in 2016 and 2017. Higher rates will keep US economic growth moderate and dampen oil demand. This also strengthens the dollar, making oil traded in dollar terms more expensive to large oil importers.

3. COP21 environmental targets: Exactly how and how fast the UN climate agreement in Paris will influence the oil balance is still uncertain, but there will clearly be a significant impact on both production and consumption of oil. Higher carbon costs and stricter regulations on emissions from oil and gas production may be imposed in some oil-producing countries, which should make oil less cost competitive compared to lower emission/green alternatives.

4. US crude export ban lifted: The lifting of the 40-year ban on US crude oil exports in late December 2015 could lead to a further increase in US oil production, and environmental groups have reacted with fury. However, the export of large volumes of US light tight oil into a saturated global market are unlikely in the near future, and US shale producers have already cut output in response to lower prices. Lifting the export ban is expected to lead to increased competition and less pressure in the Brent market and thus lower Brent prices.

5. Libya’s peace deal: Libya’s two rival factions signed a UN-backed deal to form a unity government in December, hoping to end four years of chaos in the oil-rich North African nation. Before the downfall of Gaddafi in 2011, Libya produced around 1.6 MMbopd, but fighting has stopped operations at strategic oil terminals and production fields, and output is down almost 80%. With a lasting peace agreement Libya can ramp up production, adding to the large supply glut.

6. A mild winter: Unusually warm weather at the start of the winter season reduced heating oil demand and increased the downward pressure on crude oil prices.

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