Recent turmoil in the oil markets is evidence that they are notoriously hard to predict, QNB has said as the bank expects an oil price of $44 for a barrel this year under its “baseline view”.
Oil markets have been over-supplied since the beginning of 2014. The build-up of inventories has led to a sharp decline in oil prices from $115 per barrel in mid-2014 to $34 currently. But the latest data shows that the oil market is slowly adjusting to the demand/supply imbalances, QNB has said in an analysis.
Low prices are encouraging higher energy consumption and also pushing high-cost suppliers out of the market. The progress of this adjustment process as well as the impact of new shocks will determine oil prices in 2016.
Under its baseline view of continued demand growth, US supply cuts, higher Iranian exports and sustained production from the rest of Opec; QNB expects the Brent crude oil price to average $44 in 2016.
Oil markets are currently over-supplied by around 1.6mn bpd. Four questions are likely to determine how this excess supply will be cleared and therefore shape oil markets in 2016.
First, will the strong demand growth (which reached 1.6mn bpd in 2015, a five-year high) persist into 2016?
Second, how will the high-cost US shale producers respond to low prices, which are making some of their businesses unviable?
Third, when will the sanctions on Iran be lifted and how much more oil can Iran produce once they are lifted?
Fourth, will the rest of Opec continue producing at current levels or will geopolitical factors disrupt their production?
To assess how these questions will impact oil prices, QNB has considered three scenarios.
Each scenario, the bank said, gives a combination of views on the four questions.
1. Under the baseline scenario, QNB forecasts oil demand to rise by 1.2mn bpd in 2016, in line with the International Energy Agency (IEA). China and other developing Asian countries will continue to be the main driver of global demand growth.
Chinese consumers’ rising demand for cars and transportation is outweighing slowing demand for energy in the industrial sector. QNB also assumes that US shale oil production will be reduced by 0.4mn bpd as some high-cost producers are driven out of the market. Consistent with the IEA, it assumes a gradual ramp up in Iranian oil production, with Iran ultimately adding 0.6mn bpd to global oil supply by June 2016 following the lifting of the sanctions in the second quarter of the year. Finally, it stipulates that Opec’s crude oil production - excluding the additional Iranian supply - will be maintained at current levels of 31.7mn bpd.
Under this scenario, the excess supply in the market is likely to be reduced to 0.8mn bpd. Based on the historical relationship between changes in excess supply and oil prices, QNB expects oil prices to average $44 in 2016, down from an average of $54 in 2015.
2. The bearish scenario assumes a more subdued demand growth of around 0.9mn bpd, equivalent to that of 2014. It assumes that US shale producers will not cut their output and manage to maintain production at current levels. Sanctions on Iran are assumed to be lifted in the first quarter of 2016. This will allow Iran to ramp up its production by 1mn bpd by the end of the year, the upper end of the range of analysts’ estimates. Other Opec countries are also assumed to pump out more oil, adding an average of 0.7mn bpd.
The market imbalances will widen and excess supply will increase to 2.2mn bpd. As a result, oil prices are expected to average $36 in 2016, a decline of nearly a third compared to the 2015 average price.
3. The bullish scenario stipulates that the strong 2015 demand growth of 1.6mn bpd will persist into 2016. US supply is assumed to be cut by a more-than-expected 0.6mn bpd. Iran is assumed to add only 0.3mn bpd by end-2016. Production from other Opec countries is expected to be reduced slightly, maybe due to geopolitical or security factors.
Under this scenario, the market will rebalance in 2016 with demand outgrowing supply by 0.3mn bpd. As this starts to work out the large inventories built up over the last couple of years, oil prices will average $50 in 2016.
According to QNB the recent turmoil in the oil markets was evidence that they were notoriously hard to predict. One way to deal with the significant uncertainties present in the market is to consider different scenarios.
“Our attempt to quantify how different views impact oil prices shows that oil prices are expected to average $44/b in 2016 under our baseline case. A more bearish scenario, in which demand growth is more subdued than the baseline while supply growth is more robust, will result in oil prices averaging $36/b. On the other hand, a more bullish scenario, in which we get deeper supply cuts and stronger demand growth, could lead to oil prices averaging $50/b,” QNB said.
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