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Oil Price Forecast for 2016: Will Prices Rebound or Stay Low? Lombardi Letter 2017-09-07 02:08:31 oil price forecast oil prices 2016 oil price forecast 2016 oil predictions oil price in 2016. The oil price forecast for the remainder of the year and outlook for oil prices in 2016 looks bleak. News https://www.lombardiletter.com/wp-content/uploads/2016/08/Oil-Price-1-150x150.jpg

Oil Price Forecast for 2016: Will Prices Rebound or Stay Low?

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Oil price

Oil prices have been under serious pressure over the last year and at $60 a barrel, has fallen by more than 40% since June 2014. Many are wondering if oil prices have bottomed. It doesn’t look like it. The oil price forecast for the remainder of the year and outlook for oil prices in 2016 looks bleak.

That’s because global growth forecasts are weak and OPEC (Organization of the Petroleum Exporting Countries) has said it has no intentions of cutting back on production. This means the world will be flooded with oil there is no demand for.

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While predictions for oil at $20.00 per barrel in 2016 is a little too bearish, the golden days of oil at $100.00 per barrel is far too bullish. In fact, it may not be a matter of years before we see oil hit $100.00 per barrel again, it’s a matter of ‘if’. When it comes to an oil price forecast in 2016, $65.00 may be the new $85.00. But even that may be too optimistic.

Oil Prices Bow to OPEC?

Oil prices hit an eye-watering $107 per barrel in June 2014; no one knew that the bullish outlook for oil was about to go south. Over the last 12 months, oil prices have tanked on a weak global economic outlook, growing inventories, and lack of demand.

Between June and November 2014, oil prices fell around 20% to approximately $80 per barrel. But that was just the beginning. Oil output used to be predicated by supply and demand metrics.

If the world needs more oil, producers pull just enough out of the ground to meet demand and sustain oil prices. If demand for oil wanes, producers cut back on production in an effort to shore up prices. It’s how OPEC, the Saudi led oil cartel has always operated and everyone thought always would. After all, can you ever have too much money?

Apparently yes.

Oil prices took an unexpected hit in November 2014 after Saudi Arabia refused to cut OPEC oil production. Saudi Arabia, a country that had no trouble with sky high oil prices and nary a care about what the rest of the world was going through, all of a sudden experienced a previously unheard of bout of altruism…and decided there was no need to cut the supply of oil.

Saudi Arabia was going to supply the world with oil whether there was a need for it or not. By January 2015, oil prices had crashed to around $43.00 per barrel and by March, oil prices had fallen to $42.00 per barrel.

Why would Saudi Arabia continue to flood the world with oil that nobody wanted or needed? Why would Saudi Arabia be content with oil at $42.00 per barrel when it could manipulate the market at $100.00 per barrel? Because it can. And because Saudi Arabia doesn’t like competition.

In a world awash in oil, OPEC’s refusal to cut production has been widely seen as an attempt to undermine the U.S. shale industry and support its own market share. By keeping oil production at a break neck pace…whether there is demand or not, OPEC (and by that everyone means Saudi Arabia) expects to drive high-cost fracking producers in the U.S. out of the market.

We all know Saudi Arabia is behind the move because it is home to the world’s biggest oil reserves.  Though Russia and the U.S. are in hot pursuit of this title. I digress. We also know Saudi Arabia is pulling the strings because they are the only member of OPEC with enough money to wait out the low oil prices.

The same cannot be said for beleaguered OPEC members like Iran, Iraq, Nigeria, and especially Venezuela. In fact, these cash strapped countries are essentially begging for oil production to be slashed. But really, who is going to stand up to the House of Saud?

After all, besides oil, what does Saudi Arabia and the other members of OPEC have to offer the rest of the planet economically? The UAE might be a great place to hold a convention and Qatar might be the worst place to hold the World Cup but other that that…

OPEC needs to maintain its hold on global oil prices. Now more so than ever. Because OPEC’s influence in waning. Between 2007 and 2015, OPEC’s global share declined from 37% to 31%. Over the same time frame, global demand for oil actually increased by 6.6 million barrels per day. (Source: Worldoil.com, May 31, 2015.)

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Have Oil Prices Bottomed?

Oil prices have experienced a bit of a Renaissance since the middle of March, climbing more than 40% to around $61.00 per barrel. This has led many overly optimistic oil and gas analysts to wisely proclaim that the days of cheap oil are in the past!

Their oil predictions may be a little premature. I’m not so sure their oil price predictions for 2015 will hold. Nor will their oil price forecast for 2016. Hope springs eternal…but not when it comes to oil prices. The underlying fundamentals to not just support oil prices but to propel them sustainably higher just do not exist.

Oil prices are still down around 50% from this time last year. OPEC is widely expected to, at the very least, maintain its production levels when it convenes next on Friday, June 5.

There is a reason why energy bulls should be a little worried about the oil price forecast for 2015 and 2016. Oil is trading in a deceptive sweet spot near $65.00 per barrel. That’s just enough of an incentive for some latent oil producers to ramp up production which has the added effect of adding more oil to a saturated market.

Especially when you consider the global demand for oil is stronger in the second half of the year. But that’s only when there is a strong global economy and increased demand. Which there isn’t.

While many believe the days of $40.00 per barrel are in the rear-view mirror, a double dip in the normally stronger second half of the year is entirely possible. We may be revisiting oil at $40.00 per barrel or even lower in the second half of 2015. That puts any bullish oil price forecasts for 2016 into limbo.

OECD Slashes Global Growth Forecast

Like all commodities, oil and gas prices are predicated on supply and demand. And the demand simply isn’t there. The Organization for Economic Co-operation and Development (OECD) recently slashes it global growth forecast after an underwhelming first quarter contraction in the U.S., the world’s biggest economy, and slower-than-expected growth in China, the world’s second biggest economy. (Source: oecd.org, June 3, 2015.)

Not surprisingly, the OECD gives the global economy a grade of B-. A grade that won’t get you grounded but one you need to really work on. This year, the gross domestic product (GDP) of its 34 members, will limp along at 1.9%. In 2016, GDP is expected to rise at a princely 2.5%. While predictions for GDP growth in 2016 is much better than 2015, chances are really, really good that the OECD will revise its guidance lower. Just like it did for its 2015 guidance.

Specifically, the OECD cuts its outlook for U.S. GDP growth in 2015 to just two percent from the wildly optimistic 3.1%. It also cut U.S 2016 GDP forecast to 2.8% from three percent.

China, which has posted GDP well above seven percent could slow to 6.8% this year and 6.7% in 2016. Output in Japan, the world’s third largest economy, will move at the glacial pace of 0.7% in 2015 and 1.4% in 2016. In the euro area, the world’s biggest economic region, GDP will climb a miserly 1.4% in 2015 slightly better 2.1% in 2016.

Add it up. A steady supply of oil is flooding a global economy that simply doesn’t need it. Sure, oil prices have been trending higher since March, but that’s because of knee-jerk investors looking to cheer any sign of good news. No matter how marginal.

Thanks to the alarming chasm between supply and demand, it looks like $65.00 could be the new $85.00 for oil prices in 2016. And even that might be a little too optimistic.

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