Oil Price Forecast for May 2015: the U.S. vs. OPEC

Oil Price ForecastThe oil price forecast for 2015 continues to be dominated by the actions of the Organization of Petroleum Exporting Countries (OPEC). And its fierce rival, the U.S. Supply, continues to outweigh demand. But oil drifts higher. Where will prices go from here?

Oil Price Forecast 2015: Supply vs. Demand

The oil market is dominated by the fundamental principle of supply and demand. The oil price forecast for May 2015 and beyond is heavily dependent on the changing supply landscape.

Total supply stands around 95.2 million barrels per day (mb/d); while global demand stood at 93 mb/d at the end of the first quarter of 2015. That’s a difference of 2.2 million barrels per day. That difference is equivalent to the total oil supply out of Venezuela, or all of the oil currently being produced in Africa, or about half of Canada’s production. (International Energy Agency, April 15, 2015.)

The two percent difference between supply and demand could be eliminated if oil producers pared down their output. Oil exporters continue to ignore the market imbalance and lower prices with production marching forward across the globe.

Global supply can be further broken down to OPEC and non-OPEC production. According to the latest figures, for March of 2015, OPEC production totaled 31.02 mb/d or nearly 33% of global output. OPEC’s leading producer, Saudi Arabia, has continued to increase production. And the cartel as a whole has pumped out an extra 0.7 mb/d in 2015 alone. That’s a large increase in a low-price environment. (Source: International Energy Agency, April 15, 2015.)

So the notion that Saudi Arabia and other OPEC culprits like Iraq are increasing production to maintain market share is supported by the numbers. However, oil output from the U.S. has also gone up—rising nearly 1 mb/d since 2014.

Prices March Forward

Despite the unbalanced supply and demand conditions, oil prices have climbed 35% since their March 2015 lows. And by 2016, the U.S. Energy Information Administration (EIA) sees West Texas Intermediate oil prices hitting $70.00 per barrel. (EIA, April 7, 2015.)

Part of the reason has been the expectation that major oil producers would continue to cut their capital spending, reducing future output. North American rig counts, a proxy for spending and activity in the oil patch, have declined more than 50% in the past year. (Source: Baker Hughes, April 24, 2015.)

Another factor supporting oil prices is the expected increase in demand—set to average 93.6mb/d in 2015, up from 92.5 mb/d in 2014. The higher demand is expected to come from Asia, the Middle East, and Africa. Lower oil benefits most European economies. It also benefits Asia with several net importers like Japan, South Korea, and China happy to pay less for their energy needs. Even the U.S., which consumes 55% more oil than it produces, stands to gain from this.

Light Crude Oil Spot Price

Light Crude Oil – April 1999-Present,
Chart courtesy of www.StockCharts.com

Based on current production levels only, Saudi Arabia and Iran have enough spare capacity to markedly increase their output. Another 3 mb/d could be added if the two players strived to produce at full capacity—with two-thirds of that potential increase coming from Saudi Arabia.

However, Saudi Arabia’s production isn’t likely to increase above the already elevated levels. What the market should be concerned with is production growth out of Iran—after the lifting of sanctions.

Iran produced roughly 2.8 mb/d, in March of 2015. But based on capacity estimates, it’s able to raise production roughly 30% to 3.6 mb/d. Iran’s major customers (China, India, and Turkey) are already increasing their purchases. (Source: International Energy Agency, April 15, 2015.)

Moreover, according to the International Energy Agency (IEA), in anticipation of increased Iranian output, producers are likely to raise production in order to maintain market share. But, Iranian sanction will not be removed instantaneously, as the International Atomic Agency will have to verify that all agreed-upon measures have been implemented. Only from there will the U.S. move to remove trade restrictions. (Source: International Energy Agency, April 15, 2015.)

Crude Oil Price Forecast for May 2015 and Beyond

Oil prices likely overshot to the downside, declining nearly 60% from their August 2013 peak. Since their low of $43.00 per barrel, prices rebounded 35%, and they are likely to inch even higher. While $100.00 oil is currently out of the question, the $70.00 target price for 2016 is within grasp.

My opinion is that it won’t be a sharp move higher, but a gradual increase, with plenty of near-term volatility. Uncertainty surrounding Iran’s production, continued U.S. production growth (despite declining capital spending), and uncertainty surrounding world demand will prevent oil prices from breaking out significantly in the near term.