Tuesday, March 29, 2016

Despite the Oil Rally Expect Low Prices to Continue in 2016

Even though we have seen a recent uptick in oil prices the outlook in the short and medium term is anything but bullish. According to a number of energy pundits, there is little reason to believe that oil prices will keep their current value. First, despite the agreement to reduce production from Saudi Arabia and Russia, there is no agreement from other producers to curb production and secondly Iran’s oil shipment to Europe will rise sharply by May.

In a March 29th Seeking Alpha article titled, "Big Trouble For Oil Prices Could Be Brewing," Daniel Jones says that despite the rise in oil price the short term future does not look good. "[T]he market suggesting additional upside may not be possible near-term or downside is probable," Jones said.

Oil prices may decline as we see more production, ongoing soft global demand and unprecedented urgency to cut production in the wake of the COP21 agreement in Paris. Demand is expected to remain sluggish for the foreseeable future. As explained in a World Watch post by Philip Killeen:

"Projections on the demand side are equally grim. The most recent market status report from the International Energy Agency has revised projected oil-demand growth downward through 2020, citing unusually warm winters, the reorientation of large consumers like China away from oil-intensive industries (such as heavy manufacturing) toward more consumer-driven economies, and the increasing competitiveness of renewable energy and natural gas against petroleum and coal in emerging markets."

On March 29th, Reuters reported that US commercial crude oil stockpiles were expected to have reached record highs for a seventh straight week and analysts are forecasting record levels for US crude stockpiles.

There are indications that the recent rally is already faltering. On Tuesday the price of a barrel of oil (Brent crude) fell below the $40 mark to $39.69.

Major suppliers of oil are set to meet on April 17 in Doha, however there are indications that efforts to increase production from cash starved nations like Russia and Iran will increase global supply.

"The numbers continue to suggest a supply glut and I suspect that more talk is relevant out of OPEC and Co to help the price stand up or to help it remain relatively stable," Jonathan Barratt, Chief investment officer at Ayers Alliance in Sydney, said.

On March 28th Barclays predicted that in the second quarter of 2016, "the price of oil could fall back to the low $30s."

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