At What Price will Crude Futures End 2016?
Current forecasts for the end-year price level for US crude oil are in sharp disagreement, as market observers’ debate the effect of record high oil inventories, strong demand, and the impact sharp cuts to capital expenditures for drilling and expected energy company bankruptcies will have on new production.
Price volatility for West Texas Intermediate futures on the New York Mercantile Exchange was high in the first quarter, with market participants whipsawed with a price plunge to a $26.05 bbl nearly 13-year low before rallying 61% to $41.90 five weeks later. Sentiment turned bullish as Saudi Arabia and Russia floated a proposal to freeze production at their January output rate even though analysts poked holes in their plan, highlighted by a production ramp up by Iran.
Iran had just won relief from sanctions on its crude exports in January, and is determined to quickly increase production to its pre-sanction’s rate. In the United States, crude production remained robust over 9.0 million bpd, albeit down from a 2015 peak just shy of 9.7 million bpd while OPEC output increased consistently in the first quarter.
As the market debates production, commercial oil inventory held by the 34-country members of the Organization for Economic Cooperation and Development began 2016 with a record high overhang, and US crude oil inventory reached its highest point since 1929 in March. Moreover, the International Energy Agency said OECD oil inventory could add another 285 million bbl in 2016.
Low oil prices have translated into strong gasoline demand in the United States, and China’s slowing economy is still consuming an increasing amount of oil, although the annual growth rate has dropped. Perceived economic headwinds could unravel the bullish scenario.
Increasingly, 2016 looks like a pivot year for the oil markets, with US policy now ending restrictions on exporting crude, the first cargo of LNG was exported from the Lower 48 states in February, and the grand opening of an expanded Panama Canal is slated for the summer.
US LNG exports aren’t likely to salvage natural gas futures this year however, with production reaching a record high and storage levels could exceed capacity late in the summer, exacerbated by a warm winter, that forces production shut-ins. Natural gas is widening its market share however, with the commodity expected to overtake coal in generating electricity on an annual basis for the first time in 2016.
Watch Brian’s session: Oil and Gas: All Stored Up with Nowhere to Go, on April 20th at the NIBA NYC Conference.
Brian L. Milne – Schneider Electric Energy Editor, Product Manager
Milne manages the refined fuel’s editorial content, spot price discovery activity and cash market analysis for Schneider Electric’s energy segment. Milne has 20 years’ experience in the energy industry as an analyst, journalist and editor, serving as Managing Editor for Btu publications and journalist with Bridge Information Systems America before joining DTN in 1999. His industry and market focus include natural gas, NGLs, electricity during its move to deregulated markets in the late 1990s, biofuels, and the downstream petroleum industry. He has been quoted in national media outlets that include The Wall Street Journal, USA Today, Barron’s and Newsweek and regularly provides industry commentary for media including Convenience Store Decisions and Biofuels International. Milne graduated Magna Cum Laude from Monmouth University in New Jersey with a B.A. in History and an Interdisciplinary in Political Science
