Brent Oil Price Forecast 2016: Get Ready to Pay More At the Pump
The past year has been a godsend for drivers when it comes to prices at the pump. Can motorists expect more of the same in 2016? Not likely. According to this Brent oil price forecast for 2016, drivers should expect to pay more at the pump in the New Year.
On September 30, Russia’s president launched a military intervention in Syria, ostensibly to support the government of President Bashar Al-Asad in Syria against the Islamic State (IS) and other militants. The areas IS currently occupies are rich in oil resources.
In 2013, sales of oil and gas have generally accounted for 50% of Russian revenues and 68% of exports, adding to revenue losses over the past few years. In 2009 alone, gross domestic product (GDP) dropped eight percent. (Source: “Russia: International energy data and analysis,” Energy Information Administration, July 28, 2015.) In 2014, while popular support for President Putin rose to 84% after the European Union imposed sanctions for the invasion of Ukraine, the ruble dropped 16% compared to the U.S. dollar.
In 2015, Russia has entered a period of deep recession, which had already appeared on the horizon with the strong braking of autumn 2013. At that time, it became clear that the only factor that can curb the inevitable economic downturn would be income generated from oil and gas. Russian GDP dropped 4.6% for the second quarter of 2015 compared to 2Q14, a real collapse. Meanwhile, industrial production has dropped by more than three percent year-over-year and investments in capital goods were down by more than six percent. (Source: “Russia GDP Annual Growth Rate,” Trading Economics, last accessed November 10, 2015.)
Translation: the Russians, to sum up, are faring much worse than a year ago. This means investors need to ramp up their Brent oil price forecast for 2016.
Putin Could Send Brent Oil Prices Soaring in 2016
Oil prices rose 12% in October, coinciding with the Russian attack in the Middle East as Brent oil crossed the $50.00 mark, rising to $53.00 and $50.00 a barrel. In the same period, the Russian ruble has gained six percent against the dollar. Moreover, in October 2015, the slightly higher Brent oil prices pushed the Russian stock market to gain 7.5%. (Source: Meyer, D., “Russian Ruble Gains on October 5 as Crude Oil Prices Rise,” Market Realist, October 6, 2015.)
While not an oil producer, Syria plays an important role in the distribution of oil. The reality of Western alliances in Syria complicates the picture. An emerging Russia-Iran-Iraq-Syria bridge is seen as threatening by some Western powers and their Middle-Eastern allies, or vice-versa. The extraction (as in the corresponding steps in the chain of production and distribution) contributes to the price of Brent oil.
Chart courtesy of www.StockCharts.com
Therefore, Saudi Arabia’s increased production cannot last much longer, regardless of its rivalry with Iran. Russia’s renewed importance in the wider Middle East context and the efforts to prop up its regional allies are forcing Saudi Arabia to accept the Russian-Iranian axis, which means to reduce production.
The Saudis will also breathe a sigh of relief because artificially flooding the oil market to keep prices low has constrained the kingdom’s budget, putting the generous welfare measures that help ensure stability in the country at risk. Members of the Organization of the Petroleum Exporting Countries (OPEC) will inevitably follow suit, likely resulting in a bullish Brent oil price forecast in 2016.
How Much Can Brent Oil Prices Soar?
Lower production will undoubtedly affect the rising price of Brent crude oil, but President Putin is not interested in weaving as intricate a diplomatic-military strategy as he has for a minor increase. Putin expects oil to return to prices that accommodate Russian budgetary constraints, meaning a level of upward of $80.00 per barrel.
Russia’s military and diplomatic action in the Syrian conflict signs the final return of the great Russian bear in international power games to an extent that has perhaps not been seen since the collapse of the USSR. Indeed, since the Soviet Union collapsed, Russia has confined its military interventions to its immediate sphere of influence: the Caucasus and Central Asia.
By intervening directly in Syrian territory, Russia wants to resume a protagonist role in the region, centered on Syria, a close Moscow ally during the Cold War. In contrast, Russian weapons are doing much of the talking in Syria, Russian diplomacy has quietly been reconfiguring the relationship with the Saudis.
For Russia, the Mediterranean remains primarily an access corridor to the Atlantic Ocean from the Black Sea via the Suez Canal or the Strait of Gibraltar after crossing the Turkish Straits. Until recently, Russia has not given much attention to the Mediterranean because it does not rely on the Suez Canal for marine traffic or oil and gas trade in the Gulf.
In 2014, it was Saudi Arabia who fired the first salvos, adopting an aggressively bearish crude oil policy to protect its market share. While Iran was certainly one of the Saudi pricing targets, the deliberate low oil price policy was intended to hit the Russian Federation’s budget. The Saudis used a similar method to accelerate Gorbachev’s pullout from Afghanistan in 1986. The Saudis also wanted to make the U.S. shale oil industry redundant; shale oil’s production is only economically viable when prices are at $75.00–$80.00 per barrel.
After an extended period of hostility, the Saudis themselves have found it necessary to work with Moscow, whereas the idea that Riyadh and at least some in the Washington establishment worked in concert in an anti-Russian and anti-Iranian effort, other considerations, such as sustaining the eurozone by keeping oil prices low, may also have been at play.
Thus, beyond its stated aim to push back the Islamic State while helping to maintain the regime of Bashar al-Assad afloat, at least until some alternative solutions are viable, Moscow is playing a major power game. It is pursuing an old imperial dream, which has always attracted Russia to the warm seas of the South, especially the Mediterranean.
The end of the Cold War and the dismantling of the eastern bloc saw a net decline of Russia in the area. Its passivity during the crisis and the first Gulf War (1990–1991) is symptomatic of this reflux. A renewed ambition in the eastern Mediterranean still draws in the broader context of reaffirming the greatness of “Great Russia.”
Finally, the crash of the Metrojet Airlines Airbus A321, now all but confirmed to have been the result of IS, killing 224 passengers in the Sinai (Egypt), this event will be remembered as one of the cruel prices that Russia has paid to reassert its power in the region. Russia’s grandstanding has also worked because its strategy to contain Ukrainian nationalists has worked. (Source: “Recent Quiet in Ukraine Offers Hope for a Peaceful Resolution,” The New York Times, October 19, 2015.)
What does all of this mean for my Brent oil price forecast for 2016? It doesn’t take an expert to figure out that this means Brent crude could be heading higher.
This Could Push Brent Oil Prices Over $100.00
Moscow has achieved all objectives essential in Ukraine, where a separatist war started in March 2014. Russia has stopped its Maidan separatist allies and their rise in other parts of the country, setting the stage for a gradual rapprochement with the West as well. Consequently, the West and its allies will be in a position to justify a loosening of sanctions and restrictions against Russia.
The rapprochement between Moscow and Riyadh is the crucial element in the evolution of the Middle-Eastern chessboard. As early as February 2015, The New York Times published an article hinting that Russia and Saudi Arabia were secretly negotiating a Saudi cut in oil production to boost oil prices in exchange for Russia dropping support for Asad in Syria. (Source: “Saudi Oil Is Seen as Lever to Pry Russian Support From Syria’s Assad,” The New York Times, February 3, 2015.) Of course, this has not happened, but a compromise between the two positions was likely reached.
The evidence for this is that even President al-Asad has intimated that he would be willing to relinquish power should the Russians succeed in stabilizing Syria. In short, the Russians have secured the no-regime-change option for Asad, while the Saudis and the Americans have the reassurance that Moscow will not insist on Asad leading a post-Islamic State Syria.
A visit last June by the Saudi defense minister Mohammed bin Salman al-Saud (King Salman’s son) to St. Petersburg was another hint of Russo-Saudi detent. That visit was followed in early July by a series of unprecedented agreements relating to Saudi investment in Russia of up to $10.0 billion. (Source: “Saudi sovereign fund to invest $10bn in Russia,” The Financial Times, July 6, 2015.) In October, the Saudi prince visited Moscow again to discuss Syria, the fight against terrorism, and military cooperation.
As an oil producer and almost a rentier state, Russia has many shared interests with Saudi Arabia and other Gulf monarchies. The Russian leadership is very comfortable and possesses the necessary knowledge to deal with the Saudis, even as they have different overall goals for Syria in context.
Here’s the Bottom Line on Brent Oil Prices
One of the shared interests is in raising oil prices and Putin may have convinced King Salman to act where others, including important allies like the United States, have failed. Despite criticisms, the Saudis are sharp diplomats; they understand that in order to limit the “damage” done by tighter Russo-Iranian ties, the best way to interfere is to reopen their own ties with the Russians. Together, Russia, Saudi Arabia, and Iran can then discuss how to move Brent oil prices back up to the $100.00 level.
The bottom line: most energy analysts have failed to appreciate the gravity of this situation. I suspect many will be ramping up their Brent oil price forecast for 2016 in the coming weeks.