2015 was an important transitional year for the oil market that led to the collapse of the cost of a barrel of oil in mid-2014, progressively evolved into the current crisis that is not expected to be resolved soon and that, on the contrary, has emerged into a “lower for longer” scenario.
2015 was characterised by the following factors:
- The global oil demand responded to falling prices with a significant increase on 2014 (+1.8m bbl/d) while there was less growth in supply (+2.3), which reached record levels, both in OPEC and non-OPEC areas;
- There was great resilience in the US shale industry: output began to decline (moderately) from May, almost a year after the fall in prices;
- OPEC has maintained its strategy in defence of market share, despite increasingly evident internal splits;
- The possible return of Iranian crude – as a result of the nuclear agreement reached between Iran and the West, which culminated in the removal of sanctions in January 2016 – and economic slowdown in China – whose criticality may affect the global economy and oil demand – have fuelled bearish expectations;
- Finance, after an mainly wait-and-see attitude, at the end of the year adopted a more bearish approach, with a record wave of sales by operators for speculative purposes.
Brent – the international benchmark – closed with an annual average of $52.5/bbl, a far cry from the $110 average that characterised the period 2011-2013 and the $99 of 2014.
As of October, in particular, the slump continued until reaching – in January 2016 – a minimum of $26/bbl, a level not seen since 2004 and partly determined by financial pressures that have amplified a bullish trend dictated by market fundamentals.
Similarly, it is very likely that underlying the recent recovery in prices – back at around $35/bbl in late February from the low levels of January – there is a return of optimism, with many operators now betting on a rise, despite the physical market still being characterised by weakness and an uncertain economic environment.
Below is a brief description of the main variables that characterise the market in early 2016:
- a slight increase in demand: the International Energy Agency estimates indicate growth of +1.2m bbl/d, lower than that of 2015 mainly due to the lower contribution of China (+0.3 million bbl/d vs 0.6 in 2015) and OECD consumption stability after the increase recorded last year;
- attempts at cooperation between OPEC and non-OPEC, but for now with nothing concrete and several unknowns: the Russian Energy Minister, Alexander Novak, declared that major producing countries, representing 73% of world supply, have shown a willingness – at a meeting in Doha in February – to freeze production in the current year in order to support prices; including Saudi Arabia which, while announcing that it would not proceed with further increases, also excludes the possibility of cuts and says they are even ready to face a scenario of $20/bbl. Then there is Iran, whose intentions are clearly oriented towards productivity growth in the post-sanctions era, even though there is some uncertainty about the timing and intensity of its return to full capacity;
- high stock levels: emblematic of the fact that in the United States, following the end of availability in traditional storage sites on land and at sea, is pointing to the use of rail tanker carriages, currently underutilised owing to the excessive costs of this mode of transport;
- uncertain economic outlook: institutions like the International Monetary Fund (IMF) and the World Bank have expresses contained enthusiasm regarding global economic growth in 2016; on the basis of significantly different estimates (+3.4% and +2.9% respectively), both highlight a difficult economic environment for emerging and developing countries, which account for over 50% of world GDP.
In essence, 2016 seems set to be another year of low prices, economic uncertainty, volatility and obvious difficulty in predicting how and when this phase will end.
In this context, projections are extremely difficult, as is shown by the continuous and substantial downward revisions made recently by major investment banks and analysts to price forecasts for 2016.
However, several institutions are betting on a gradual recovery from current levels, behind the hypothesis of a partial reabsorption of the current surplus of supply, Goldman Sachs predicts an average annual price for Brent close to a $45/bbl, despite the fact that at the end of 2015 it repeatedly advocated the possibility of minimal daily lows of around $20.
Article Source: Eni
