Special Report Contents

• Comment: Grim 2016 for producers
• Egypt’s game-changing gas find
• The most important energy project in Iran
• Amec Foster Wheeler seeks growth in the Middle East
• The future of oil field management

The fall in crude prices during July and August has dashed oil producers’ hopes of a steady recovery from the collapse in the second half of 2015.

The oil industry has entered a new period of uncertainty, with predictions for prices in 2016 varying widely among analysts, as the market faces continued oversupply and concerns of a slowdown in the Chinese economy.

Brent crude looks likely to trade at an average price of about $55 a barrel for 2015 having been trading largely at $45-50 a barrel in the first half of September – half the value of the same period of last year.

A $55 average would represent the lowest annual price since 2005, when the Brent price averaged $54.38 a barrel, which was then a record high.

Uncertainty over the future of oil prices was brought into focus on 11 September, when Goldman Sachs released a forecast saying West Texas Intermediate (WTI) could fall to $20 a barrel. It also slashed its outlook Brent crude for 2016 to just $49.5.

Forecasts of crude dropping even further next year will cause concern for governments across the Middle East’s oil exporting countries, which are already looking to cut spending to offset the sharp reduction in oil revenues.

HSBC

HSBC cut its oil price outlook for the next three years in a research note released on 1 September.

Analysts at the UK-based bank are relatively bullish on the Brent price, forecasting a recovery to $60 a barrel in 2016 and respective increases of $10 for the following years to hit $80 by 2018.

“Demand and non-Opec supply trends have been strongly positive for restoring market balances, but are offset by relentless supply pressure from Opec,” HSBC said in a note led by head of Asia Pacific oil, gas and petrochemicals research Thomas Hilboldt.

“Rebalancing process is under way, but looks set to take longer than we originally thought – probably not until 2017,” the bank added.

HSBC warned that China’s global growth is being increasingly called into question, and risks around emerging markets (EM) in particular have risen in recent months.

Iran could provide downside risks to prices if restrictions on its crude exports are eased next year as a result of the recent nuclear agreement, said the bank, but this could be mitigated by other key Opec producers accommodating Iran and Iraq’s growth ambitions.

Upside risks to the crude price include the volatile security situation for Opec producers such as Iraq and Libya, which could cause supply disruptions, while the conflict in Yemen also adds to the Middle East’s geopolitical risk.

Production increases from Opec countries – 1.5-2 million b/d in the past six months – are unlikely to be sustainable in the longer run, the bank said, noting that Iraq is producing “well above sustainable capacity”.

The possibility of a an Opec output cut can also not be ruled out over the next two years, but in HSBC’s view this would require commitments from other exporting countries such as Russia.

Barclays

Barclays revised its crude price forecasts down in a note dated 4 September but its prediction for 2016 is more on the bullish side compared with other analysts, at $63 a barrel.

The 2016 price was cut from $68 on growing stock levels, continued US producer productivity gains and efficiencies, the shielding effect of currency moves, and economic concerns associated with China.

“The market remains in an unsteady state as it tests new equilibrium levels and comes to terms with a persistent supply overhang,” said Barclays, explaining its revised forecast.

Barclays said that commodity markets are prone to overshooting, but prices around the current range are needed for supply and demand to adjust.

This process would have occurred in the first half of 2015 under normal conditions, but one-off factors helped tight oil producers in North America during that period.

These factors included a spike in product demand as concerns over planned and unplanned outages aligned with a sharp rise in gasoline demand.

Much of the recent volatility can be explained by concerns over China, in Barclays’ view.

“A slowdown in China means more than just a slowdown in Chinese oil demand,” warned Barclays. “China’s industrial activity and global links, the energy intensity of its commodity imports and even the oil used to get these goods to the country will all stumble if China does.”

Barclays forecast for the Brent price is to average $55 a barrel in the first quarter of 2016 and then rise throughout the year to average $70 in the final three months of the year.

Goldman Sachs

Goldman Sachs caused a stir in the oil market on 11 September when it warned that the price for West Texas Intermediate (WTI) could fall to $20 a barrel due to oversupply exceeding previous forecasts.

The US investment bank’s annual forecasts are less sensational but still notable in that its analysts predict a drop in the average Brent price for next year.  

The bank is predicting the lowest-priced forecast for 2016. Goldman Sachs slashed its 2016 forecast to $49.5 from $62 and predicted the price to average $53.7 a barrel in 2015.

“The oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016 on further Opec production growth, resilient non-Opec supply and slowing demand growth, with risks skewed to even weaker demand given China’s slowdown and its negative emerging market feedback loop,” said Goldman Sachs in the research note.

The US bank believes the market requires non-Opec production to shift from prior expectations of modest growth to large declines in 2016, and the uncertainty on when this adjustment will take place has increased.

If a slowdown in production takes place too gradually it will force oil markets to clear once surplus breaches logistical and storage capacity.

“While not our base case, the potential for oil prices to fall to such levels, which we estimate near $20 a barrel, is becoming greater as the storage continues to fill,” Goldman Sachs said.

“While we are increasingly convinced that the market needs to see lower oil prices for longer to achieve a production cut, the source of this production decline and its forcing mechanism is growing more uncertain,” added the bank.

Energy Information Administration (EIA)

The Washington based EIA, part of the US Department of Energy, reduced its forecasts for Brent prices in its Short Term Energy Outlook (STEO) released in early August.

EIA reduced its forecast for 2015 to $54.07 a barrel from $60 and, for 2016, to $58.57 from $67 a barrel.

“The recent price declines reflect concerns about lower economic growth in emerging markets, expectations of higher oil exports from Iran, and continuing actual and expected growth in global inventories,” the organisation said in its August STEO.

However, the EIA maintained the same forecasts in its STEO released on 9 September despite at $10-a-barrel drop in prices over the course of August, perhaps having factored in this drop in its previous outlook.

“Along with increasing volatility in global equity prices and exchange rates, crude oil price volatility increased significantly in August, reflecting uncertainty about potential lower economic and oil demand growth in emerging market countries,” the EIA said in its latest report.

The EIA noted the unusual high volatility at the end of August and into September.

During this period Brent prices showed daily changes of more than 5 per cent for four consecutive trading days, the longest stretch of such high volatility since December 2008.

“During this period of price discovery, oil prices could continue to experience periods of heightened volatility,” the EIA forecast.

“The oil market faces many uncertainties heading into 2016, including the pace and volume at which Iranian oil re-enters the market, the strength of oil consumption growth, and the responsiveness of non-Opec production to low oil prices.”