Analysts Need to Cut Their WTI Oil Price Forecasts for 2016
Prices for West Texas Intermediate (WTI), a key U.S. energy benchmark, are getting hammered in the markets again. Surging oil production, growing stockpiles, and economic volatility continue to hammer oil prices. Could we be standing on the edge of yet another oil price collapse, perhaps sending crude to as low as $10.00 per barrel? It’s more than possible at this point if you take into account several key factors in this latest WTI oil price forecast for 2016.
$10 Oil Prices? It’s Definitely Possible
How many times will the imbalance repeat itself before people finally get the message? There is simply too much oil out there, and not enough demand for it.
According to the Energy Information Administration (EIA), global oil prices should remain under $80.00 per barrel over the next five years, if not longer. In its 2015 world energy outlook, the EIA forecasts crude oil trends out to 2040. The biggest obstacle to an oil price rebound, according to the report, is the ongoing global oversupply. This overhang should ebb away over the next half-decade, with frequent but unsuccessful WTI oil price rallies before crude finally rebounds. (Source: “Annual Energy Outlook 2015 with projections to 2040,” Energy Information Administration, April 2015.)
At this point, you might be asking, “So what’s the problem with WTI oil prices?” It’s really quite simple, and as usual, it comes down to the economic fundamentals of the situation. If the International Energy Agency (IEA) is correct in its assessment, global energy producers will be decreasing investments in the upstream sector by approximately 20% this year. (Source: “World Energy Outlook 2015 Factsheet: Global energy trends to 2040,” International Energy Agency, last accessed November 12, 2015.) This should have a negative impact on long-term production numbers, which will bring some equilibrium back to the supply-and-demand dynamics of crude oil. This prediction will be even more pronounced in non-OPEC countries, where upstream investment has been more markedly reduced.
Predictions for U.S. shale are generally positive, although the IEA maintains its reservations about the long-term survival prospects of the industry due to the higher operating versus traditional drilling. With many of the easiest-to-extract shale oil plays already underway, the so-called shale oil boom could find itself falling flat on its face before it ever really even got off the ground. If the IEA forecast proves correct, U.S. shale oil production will likely peak within the next decade at approximately five million barrels per day, after which we will be seeing a pronounced output decline.
But such a scenario carries the chance of a reversal in the economic fundamentals. A prolonged period of low WTI oil prices will continue to reduce the level of investments flowing into new projects from energy companies, a trend which, if carried to an extreme level, could possibly lead to a supply shortage down the road. What would occur then is a price spike in crude oil.
WTI Oil Price Forecast 2016 – Where’s the Demand?
OK, so we’ve talked about the oversupply issue, but what’s the deal with global demand?
It looks as if we could be seeing slowing demand growth for oil as the decade progresses. The IEA estimates just a 900,000-barrel-per-day average annual increase in demand growth until the end of 2020. (Source: “IEA: World oil supply, demand to rebalance by 2020,” Oil & Gas Journal, November 10, 2015.) Compare this to the estimated 1.8-million-barrel-per-day demand growth for this year and it becomes obvious that we aren’t likely to see a rise in demand for at least another half-decade. Despite this year’s relatively robust demand growth, the figures will slump in the coming years.
Now, it goes without saying that the multi-decade projections are a bit fanciful, and should be taken as only the most basic sort of estimate. This is because there are too many economic and geopolitical factors at play to confidently forecast energy price movements out past a few years. But general trends can be discerned with some small amount of confidence, and do set the stage for how companies will be allocating capital expenditures in the years to come. The IEA forecasts that the U.S., Japan, and the EU will together see their oil demand drop by 10 million barrels per day in the next quarter-century. (Source: “Oil Prices Will Take 5 Years To Recover – IEA,” Fortune, November 10, 2015.)
While this is a massive drop, and would mean an 11% decline in demand, according to today’s figures, one should keep in mind that the reality could be even more sharply pronounced than this conservative estimate. Once you take into account that the IEA has had a history of underestimating the rate at which society takes up renewable forms of energy and adopts efficiency measures, it’s not unreasonable to conclude that oil demand could drop by a far larger figure than originally put forth. (Source: “IEA Underestimates Renewables, Overestimates Fossils,” ClimateNexus, November 9, 2015.)
Will Renewable Energy Hammer WTI Oil Prices?
If there’s one tidbit of information I want you to take away form this article, it’s that renewable energy could very well be the undoing of global crude markets and could absolutely crash oil prices. There are several clear indicators already in play that point toward this reality. Take for instance the fact that renewable forms of energy accounted for nearly 50% of all global new electricity generation in 2014, a trend which will undoubtedly not only continue, but will also increase. In fact, an EIA report concluded that this transition is well on its way to displacing crude oil, with $0.60 of every dollar invested in power plants through 2040 expected to be in the form of renewables. (Source: “Oil price forecast to stay below $80 until 2020, IEA says,” CBC, November 10, 2015.)
Translation: renewables are getting an increasingly bigger piece of the pie. When you combine this reality with the forecasted low oil demand growth, you have the recipe for an oil price crash.
No Bottom in Sight for WTI Oil Prices
Global oversupply continues to weigh heavily on crude oil prices. With OPEC seemingly unwilling to cut production and, in fact, maintaining it at near-record levels, there will be little respite from supply pressure from that corner of the globe. Iraq, for example, is producing more oil than it has since 1962. (Source: “2-Mile Long Stretch Of Iraqi Oil Tankers Bound For U.S. Shores,” OilPrice, November 11, 2015.)
With ongoing volatility in global markets, slowing economic growth, and slumping commodity prices, it’s no wonder oil prices have fared poorly. Oil stockpiles are steadily rising across the world, while production is at a record-high level, all set on the backdrop of slowing oil demand from emerging economies. With a situation like this on our hands, it should be no surprise that I remain bearish on the WTI oil price forecast in 2016.