Oil Ends 2015 in Downbeat Mood, Hangover to Be Long and Painful

The oil downturn has turned into a rout and analysts say meaningfully higher prices are not expected before late 2016

Crude inventories in the United States, the world’s largest petroleum producer, rose 2.6 million barrels last week. (Photo: AP)

Slippery Slope

• The oil downturn has turned into a rout with Brent prices briefly falling below $36 per barrel and to levels last seen in over a decade
  
• Prices as low as $20/barrel might be necessary to allow a rebalancing of the market: Goldman Sachs.
  
• Morgan Stanley said in its outlook for next year that “headwinds (are) growing for 2016 oil”.
  
• Analysts estimate global crude production exceeds demand by anywhere between half a million and 2 million barrels every day.
  

Oil prices opened the final trading session of 2015 in a downbeat mood after record US crude inventories reinforced concerns over a global supply glut that has pulled down prices by a third over the past year.

Crude inventories in the United States, the world’s largest petroleum producer, rose 2.6 million barrels last week, the US Energy Information Administration said. Analysts polled by Reuters had expected a draw of 2.5 million barrels.

Crude prices held losses after falling 3 percent in the previous session, with US West Texas Intermediate (WTI) crude futures trading around $36.70 per barrel in early Asian hours on Thursday and Brent opening around $36.60 per barrel.

The immediate outlook for oil prices remains bleak, with some analysts like Goldman Sachs saying prices as low as $20 per barrel might be necessary to push enough production out of business and allow a rebalancing of the market.

US bank Morgan Stanley said in its outlook for next year that “headwinds (are) growing for 2016 oil” citing ongoing increases in available global supplies despite some cuts particularly by US shale drillers as well as a slowdown in demand as the main reasons.

Reflecting a market consensus that meaningfully higher prices are not expected before late 2016, the bank said,

<p>The imbalance in the global oil market has been diminishing in H2FY15, but the hope for a rebalancing in 2016 continues to suffer serious setbacks.</p>

Traders expect some US oil to be taken out of America and supplied into global markets, following the surprise lifting of a decades-old US crude export ban in December.

<p>At a time when US shale is facing headwinds due to the collapse in crude oil prices... US crude oil exports are likely to help reduce congestion concerns in the US.</p>

<p><b>ING Bank</b></p>

(Photo: AP)

Even the most aggressive estimates of expected US production cuts of 500,000 bpd for 2016 would be unlikely to fully rebalance the market.

Industry Pain

Oil prices began falling in mid-2014 as ballooning output from the Organization of the Petroleum Exporting Countries (OPEC), Russia and also US shale drillers started to outpace demand. The downturn gained pace at the end of 2014 after a Saudi-led OPEC decided to keep production high to defend global market share rather than cut output to prop up prices.

A year on, and the oil downturn has turned into a rout with Brent prices briefly falling below $36 per barrel and to levels last seen in over a decade, effectively wiping out the gains from a decade-long commodity super-cycle sparked by China’s unprecedented energy demand boom.

The downturn has caused pain across the energy supply chain, including shippers, private oil drillers and oil-dependent countries from Venezuela and Russia to the Middle East.

Analysts estimate global crude production exceeds demand by anywhere between half a million and 2 million barrels every day.

Russia and OPEC are so far showing few signs of reining in production, leading traders to establish record high active short positions in the market that would profit from further crude price falls.