Oil and Gas Investing

The Investing News Network has compiled information from a number of recent oil price outlook reports to give investors an idea of what to expect for the upcoming quarter.

For our 2016 gas price outlook, please see Natural Gas Outlook 2016: Prices to Stay Down on Oversupply.
For our 2016 oil price outlook, please see Oil Price Outlook 2016: Turnaround Targeted in late 2016.
Anyone watching the oil space knows it’s been a volatile year, with oil prices dipping below $40 per barrel just last month to hit a six-and-a-half-year low. With the fourth quarter fast approaching, market participants are anxious to find out where the experts see the price by the end of 2015 and into 2016.
With that in mind, the Investing News Network compiled information from a number of recent oil price outlook reports to give investors an idea of what to expect for the upcoming quarter.

Lower for longer

It seems that the general sentiment among experts and analysts has been that oil prices are likely to remain lower for longer. According to Scotiabank’s latest Commodity Price Index, the firm’s WTI oil price outlook has been substantially lowered. Scotiabank expects prices to stay well below US$50 for the next twelve months, before recovering to US$55 in late 2016. Looking back at the price environment in 2015, Scotiabank’s Patricia Mohr noted that prices have been exceptionally volatile this year, dropping to a mere US$43.46 per barrel on March 17, before running up as high as US$61.43 on June 10 and then plunging again to a new low of US$38.24 on August 24.
“Global oil demand in 2015 has advanced at the fastest pace in five years, but a ‘supply-side adjustment’ — necessary to bring global supplies down in line with demand and rebalance world oil markets — has not yet occurred,” she added.
What’s more, Mohr said that if WTI should stay at US$45 in September, Western Canadian Select heavy oil (WCS) “will approach the December 2008 low of US$22.91 reached during the Great Recession.”
Dundee Capital Markets echoed that sentiment, predicting that the prices would likely remain low for the remainder of the year and into next year. Dundee lowered its price prediction for WTI in 2015 from $54 down to $49.
The firm expects Brent Crude to hover around $53.10 in 2015, down from its original $59 forecast, then $55 per barrel in 2016. However, Dundee maintained its predictions that Brent crude to reach $70 per barrel in the long term.

Oil market share battles and oversupply

While there are various reasons for the oil price being as low as it is, one of the main issues has been the increase in production from both the US shale producers and OPEC countries as they battle to gain more market share. Saudi Arabia made it clear at a November OPEC meeting that is would not cutback output to help support international prices and the organization has actually increased its production in recent months, hitting a three-year high in August.
“OPEC producers have actually increased production by 1.4 million barrels per day to 31.79 million barrels per day to build market share in Asia. It appears that Saudi Arabia is preparing for a long battle for market share vis-à-vis US shale producers as well as Russia and Iran,” Mohr explained in the Scotiabank report. “Low oil prices — to spur demand — may also be a Saudi response to concern over the impact of global climate change initiatives aimed at curbing fossil fuel consumption.”
Dundee Capital Markets’ commodity update noted that while Saudi Arabia has continued to focus on market share, allied with normalization, OPEC has “long signaled a readiness to talk to other producers with regard to stabilizing the market and thus prices.” However, it also added that “no such multilateral cooperation is, in our view, likely to emerge soon.”
Another possible restraint on oil prices is the Iran Nuclear Deal and the new supply that will be coming into the market as a result, although the impact of the deal is still uncertain.
“The tentative ‘Iran nuclear deal’ suggests the return of Iranian oil to world markets, restraining prices in early 2016. However, the impact is uncertain; estimates of Iran’s production potential vary greatly (from an additional 300,000 barrels per day to 1 million barrels per day),” Mohr said.
She also outlined the approximate timetable for the Iran sanctions relief, which included the upcoming September 17 deadline for US Congress to either approve or reject the deal. On October 15, Iran will answer questions from the International Atomic Energy Agency (IAEA) and in December into early 2016, the IAEA will verify if Iran meets its commitments and if so, the EU and the US would then lift the nuclear-related sanctions on Iran.

Chinese demand

China is the world’s second-largest petroleum consumer, accounting for about 11.6 percent of the world demand, meaning the sentiment will likely remain focused on the potential of a slowdown in Chinese demand.
“We believe it is important not to over-react to current jitters and remain relatively optimistic about the medium-term outlook for China’s energy demand,” Mohr said in Scotiabank’s report.
Interestingly, despite the country’s decision to depreciate its currency t0 improve export competitiveness – which has taken a toll on all the commodities across the board as it signals an economic slowdown – China’s demand for oil has remained robust and even reached record crude oil imports in July.

US shale producers

While it is evident that US shale oil producers need to slow down their production, Mohr noted that traders and investors have been disappointed over the slow pace of the US production decline. “US shale producers have been reluctant to abandon production growth given the impact on their equity valuations and have focused on cutting costs by squeezing suppliers and improving engineering efficiency to live with ever lower oil prices,” she explained. “Drilling productivity, reflecting a shift to geologically more attractive acreage within the shales and faster drilling time, has increased by 50 percent this year.”

Another factor that will have an impact on the oil price outlook in 2016 will be whether or not these US shale producers will remain resilient at US$40 to $45 oil prices.
“Production in the Eagle Ford & Permian Basins has stayed high because many producers can now earn double digit internal rates of return even at US$40-50 oil prices. However, companies in the Bakken often require US$60,” Mohr said.
As a final note, Mohr stated that while a supply-side adjustment by non-OPEC producers has been slow, the bank expects a worldwide reduction in capital spending on exploration and development around US$200 billion, which will begin to cut output and life oil prices by late 2016 or early 2017.

Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article.
Related reading:
Alberta Oil Sands Companies Weathering the Storm
WCS Discount Dips as US Demand for Alberta Crude Oil Increases
Oil Prices Dip Below $40 per Barrel


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