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My (Bold) 2016 Oil Forecast Will Turn Heads

by | published December 8th, 2015

As we’ve learned over the course of the last year, making projections about oil prices can be a very difficult enterprise.

After rebounding to a little over $60 a barrel this summer, crude defied expectations and dropped back into the $40’s and even below to close out the year.

But don’t let this near-term move fool you. Certain elements are now gathering steam that will likely lead to a long-term rebound in crude next year.

In fact, there are several market forces that I believe will lead to higher oil prices in 2016.

And it all starts with a reduction in the “supply glut” that all the talking heads keep beating their chests about.

In this case, the reversal will occur in two phases.

First, as the year goes on I think we will see a dramatic shift in OPEC policy.

The primary element depressing oil prices has been OPEC’s strategy (led by Saudi Arabia) of maintaining and increasing production levels in order to defend market share, which started in Thanksgiving 2014.

In 2016, however, I expect this portion of the “supply glut” will begin to reverse.

Here’s why, and my target for where oil prices will go in 2016 and 2017…

Signs of Capitulation in the “Oil Price War”

In fact, several OPEC nations are now in open opposition to the Saudi policy, with Venezuela, Nigeria, Libya, Iran, and Ecuador leading the charge to make the production cuts that would ease the supply glut and send oil prices higher.

Economically, OPEC has painted itself into a corner, and the only way out now is through higher prices. Even the Saudis understand that.

That’s why Riyadh is now signaling to the likes of Russia and even the U.S. that they would support a joint move with non-OPEC producers to “stabilize” the international market.

Don’t be fooled by OPEC’s early-December decision to keep pumping. Low oil prices are hurting even Saudi Arabia, and something, or someone, will have to give.

And in a face saving caveat, I now believe the Saudis will finally end their call to “hold the line” on production, easing the oversupply and opening up the market to higher prices.

But that’s only half the story. The second phase of this capitulation will be happening here at home.

The reason why is simple. While the Saudis clearly underestimated the resolve of U.S. producers, the damage wrought by the “oil war” here at home has been extensive.

The U.S. rig count has declined precipitously, while forward capital expenditures – especially for deep, fracked, horizontal wells – have been slashed to the bone. What’s more, several major Arctic and Gulf of Mexico offshore projects have been mothballed as well.

That can’t help but lead to a drop in supply, especially when it comes to shale or tight oil. Fact is, the average unconventional oil well pumps the majority of its volume in the first 18 months.

It’s called the decline curve and it can’t be finessed forever.

Even with the application of secondary and enhanced oil recovery techniques, it’s only a matter of time now before we start to see a reduction in supply on the American side of the market.

Also, as I’ve pointed out for some time now, the “bad debt” problem on the energy side of the junk bond market is growing more acute by the day.

Bad Debt Will Diminish U.S. Oil Supply

Yield premiums are rising with no end in sight, and for drillers with a lot of debt to rollover that brings up the possibility of bankruptcy.

As a result, an increasing number of U.S. producers will disappear, be acquired, or merge with larger competitors, adding to the reduction in overall volume.

When the combination of these market forces take hold, the “supply glut” will undoubtedly begin to shrink.

As for the demand side, the global need for crude is expected to grow by an average of more than one million barrels a day annually, led by big increases in Asia.

Fact is, by OPEC’s own estimates oil demand in Asia will rise by about 16 million barrels a day to 46 million barrels by 2040.

To put that in perspective, that’s almost twice the amount currently produced by the U.S.

But as I’ve said numerous times before, this crunch has always been all about the supply side of the equation. Increasing demand has never been the issue.

And that brings us to where the price of oil is headed…

This is Where Oil Prices Go from Here

Finally, as I’ve noted over the past several months, a combination of derivative moves on futures contracts and heavy ongoing short plays have completely distorted the true value of oil.

And while “paper barrels” have always swayed oil prices for delivery (i.e. the “wet barrels”) that influence has grown far beyond any rational market justification.

In fact, I estimate the true market value for a barrel of West Texas Intermediate to be roughly $50 a barrel, or $8 higher than where it is as of the writing of this report.

What I can tell you is that these types of paper trades run in cycles. And as the profit potential from them begins to diminish, the “paper price” of crude will begin to rise to meet its true overall value as a hard asset.

Here’s what all this means.

Let me be clear: We are not racing back to $100 a barrel oil. Absent a major geopolitical outlier that impacts supply, more subdued increases in crude are in order.

Therefore, my current read on West Texas Intermediate is as follows:

  • By July 1, 2016, WTI should price at $66/barrel.
  • By October 1, 2016, WTI should price at $68/barrel.
  • And by January 1, 2017, WTI should finally breach $70/barrel.

That is where I see oil prices next year, which will allow us to make some very nice returns all across the board.

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  1. Terry
    December 8th, 2015 at 15:58 | #1

    Pardon the pun. But you are saying oil is in a fluid situation?

  2. gene tomlinson
    December 8th, 2015 at 16:18 | #2

    So, Kent where does this leave the oil transporting part of the U S Oil business? Such companies like KMI or ETP or others that move the oil and gas products would be examples. Are they going to loose out as the production from the U.S. fields reduces to meet the lower demand?

  3. Paul Ellenbogen
    December 8th, 2015 at 16:22 | #3

    As a long time follower of the energy markets it is becoming increasingly difficult to predict where prices will be in one year. Goldman is projecting 20 seems crazy but who knows? Boone Pickens probably as knowledgeable as anyone recently admitted he was wrong projecting 60-70 now. Now looks increasingly like 30 is possible. If Iran is allowed to sell more oil next year with estimates of 200-800k barrels per day more supply with a smaller demand side of the equation what will that do to the price? Time will tell.

  4. Don
    December 8th, 2015 at 16:28 | #4

    I hope you are right about the oil coming back. My portfolio is very heavy on oil.

  5. Daniel
    December 8th, 2015 at 16:30 | #5

    Dont you believe that the Iranian release of oil reserves will keep the price down?

  6. Donnie. Simpson
    December 8th, 2015 at 16:48 | #6

    I hope you are right

  7. william herdendorf
    December 10th, 2015 at 10:58 | #7

    How is it that you can write this article without any mention of Iran coming back into play
    thanks.bill

  8. Robert Pirillo
    December 12th, 2015 at 11:11 | #8

    Iran would have a minor effect.

  9. Ed adams
    December 14th, 2015 at 01:56 | #9

    We could stabilize the oil market, maintain reasonable prices at home and let the Saudis play their games as they see fit. Tax all imported oil up to a landed price of say $55. Let outsiders charg any price they want and our suppliers would get $55 min. Talk it up out there.

  10. Daniel T
    December 14th, 2015 at 18:46 | #10

    No way no how can we tax imported oil, without triggering a WTO challenge. Iran has also been factored into EIA projections for next year too.

  11. Rob Ingenthron
    December 15th, 2015 at 18:53 | #11

    Like others commenting, one of my first thoughts is that you are not properly taking into account Iran sanctions being lifted as well as other market drivers, and I find an interesting trend, specific to US oil sellers (prospectors), that Iran’s influence will be negligible, but the reality is that the math shows that it will be impactful. Iran already has a reserve ready to go, and they are ramping up for more production. I believe that most US oil producers will continue to paint a rosy picture in denial of reality.

    Oil is in the $30’s today, so it just keeps going down, but when it was recently approaching the $50’s, all the oil producers I spoke with were excitedly predicting oil in the $70’s in 2016, with the rise starting in December 2015. Obviously, it’s going the opposite way today.

    Also, the article fails to take into account that Saudi Arabia still has a huge cash reserve, and they have been feverishly working to reduce expenditures and save more cash. Currently, they could easily continue their efforts for another two years, which would further devastate the US oil producers, regardless of their “resolve”. What about the tens of thousands of oil-related layoffs in the US recently? And several other OPEC countries have enormous cash reserves and are not really affected at all by this “oil war”.

    Debts are coming due in the US for oil producers, and the speculative nature of many along with the high costs of production (e.g., fracking) is going to take a lot of producers down. Sounds great for oil prices, unless you happen to have invested in one of those many potentially bankrupt companies.

    Again, it doesn’t seem to matter what the situation is, US oil is always selling a rosy picture with a great outcome in the near future. When oil was $100, there was no way it could ever go below $80 per barrel. When it hit the $80’s, there was no way it go below $70 per barrel. And that has continued to now, where I was recently told that there was no way it would fall into the the $30’s, but that’s where it is today. I believe that the rosy picture is needed in order to continue selling new oil ventures, but now that oil is so low, it’s almost like a “ponzie” scheme, where the new sales are desperately needed to support the current operation.

    Of course oil will go up, eventually. What really sucks for many is highlighted by one of the statements made in the article, which strikes at the heart of the recent US oil boom: “Fact is, the average unconventional oil well pumps the majority of its volume in the first 18 months.” Right, while oil prices continue at these lows, many are simply losing out on the bulk of the potential investment, and when their wells start drizzling out, eventually rising oil prices won’t help them recover their losses.

  12. Will
    December 18th, 2015 at 17:03 | #12

    Hi Kent, I read the article about releasing the early 70’s oil embargo, when is Congress going to pull their head out and allow the flow of crude to bring the country back into prosperity? I don’t understand why any of the candidates haven’t had this on their main talking platforms consistently, Is this some secret deal with the Saudi’s in that we are not able to change the law? take care, will

  13. donniebgood
    December 18th, 2015 at 22:46 | #13

    Rob i read yours after i read up to dons post but they sent me to bottom of the list. you make very pertinent points and i see similar what ifs. very fair points make you.

  14. Don
    December 24th, 2015 at 02:21 | #14

    Lots of good points here. Too bad US oil policy is heavily influenced by people who know NOTHING about oil. Just because people with money, political influence and no brains think they know the answers to climate change, Alberta’s clean and secure oil reserves, etc, etc.they should keep the heir mouths shut. Rock stars should stick to music, Hollywood actors should stick to movies, and let scientists who actually know something (and I use that term very loosely) talk about oil. Where do politicians get their oil policy advice from? Bono? Red carpet celebrities who think they know something about greenhouse gas emissions? A tiny bit of “knowledge” with no facts and listening ears in high places is a very dangerous and foolish combination.

  15. Rhys
    December 28th, 2015 at 11:26 | #15

    Very nice post. I simply stumbled upon your blog and wanted to mention that I’ve truly enjoyed browsing your weblog posts.

    After all I will be subscribing to your feed and I am hoping you write once more soon!

  16. Fritz
    January 8th, 2016 at 19:01 | #16

    Interesting article, but can you comment of China’s shrinking economy and how it relates to it’s oil consumption rate in the near term? You did mention the estimate of Asia’s consumption from 16 million B/D to 40 million B/D by 2040. But with China’s slowing economy, I would infer that we still have some more short term downward pressure before the next leg up.

    Thanks in advance

  17. ron johnston
    January 12th, 2016 at 03:59 | #17

    very good artical

  18. Rob Ingenthron
    January 21st, 2016 at 02:56 | #18

    A month ago, every energy company that I talked to was *certain* that oil would be heading to $40 per barrel. And now Iran is ready to start pushing their 500,000 barrels onto the market, adding to the glut and downward pressure.

    Looks like Goldman’s prediction was pretty accurate.

    It’ll eventually go up, but not much and not in the near future. Maybe not even this year, and new investors (meaning those that got in any time in the last 5 months) will likely be stuck with producers that decide to start shutting down new production to wait it out.

    The only two significant factors that will drive up prices are bankruptcies of oil producers and/or war in The Middle East.

  19. Rob Ingenthron
    August 8th, 2016 at 20:33 | #19

    So, we are now into August and I wanted to check on the original blog post. June was looking good for a short time, but, sadly, my original response was more accurate as the U.S. crude supplies rose to 522.5 million barrels as of July 29, the highest seasonal level in decades, with even more pressure on reduced prices with refineries operating at a reduced capacity. All that, and the price of oil went under $40 per barrel today, so we are going in the wrong direction for Dr Moors’ projections. It looks like the glut will grow, the hedges will continue, and the price of oil will continue a slow slide down into the $30’s.

    At least one oil trader, Andy Hall, believes there could be a “violent reversal” upward for oil, but I honestly don’t fully get his logic, unless he’s thinking there will be a production decline due to some more producers going out of business. But, here’s hoping he’s right…

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