Will Oil Prices Rebound in 2016?

January 25, 2016

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by Nick Cunningham (OilPrice.com) Oilprice.com recently spoke with Carl Larry, Director of Oil and Gas at Frost & Sullivan, a consultancy that conducts research on oil and gas markets, to get his thoughts on the state of oil in 2016.

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OPEC up until now most people had thought that the Saudis and the rest of OPEC were really pushing hard to slowdown or stop altogether shale production in the U.S. But what it seems now is that they are really fracturing OPEC, and in some ways almost undermining their own members.

So with oil prices down here and with production staying so high, it becomes a point where it's unsustainable for countries like a Nigeria or a Venezuela to continue on. I mean, other countries within OPEC are still struggling with these oil prices, including Saudi Arabia. But you can see that going forward that the more that the pressure stays on those countries that are outside of the Middle East, it's possible that they are the ones that are going to have to blink first. They are the ones that are going to have to cut back production.

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Now that Iran is going to lighten those loads and hopefully dismiss those tankers, there are going to be a few extra tankers on the market, rather than just thinking of it as a lot more crude on the market. So that's definitely a possibility. I think the U.S., though, is still in a position where if they wanted to increase their storage we could see a lot of that open up by decreasing our imports, which is still a possibility.

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We could see a spike because of that lack of ability to get more oil online outside of Saudi Arabia. But the game has changed in the last few months even. The U.S. is producing 9 million barrels per day. We are importing 3 million from Canada alone.

So if prices were to go higher, I think that production in the U.S. could increase and even in Canada. And the difference now is that the U.S. can export crude oil. So if there is a lack of supply out there, the U.S. does have the ability to kind of make up some of that ground if necessary. So that's the game changer here. The U.S. lifted the export ban and the high U.S. production, including Canadian production and possibly even Mexico...we could probably make up for that a lot faster than we could have in past years.

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But when you think about the risk-reward...North Sea in Europe, or Russia at 10 million barrels a day, or the U.S. with the ability to climb up and down and export crude, conflict in the Middle East would definitely raise prices but it would definitely be an advantage to countries that are now starting to pick up the pace. READ MORE and MORE (Politico Magazine) and MORE (Bloomberg) and MORE (CNN) and MORE (Wall Street Journal)

Excerpts from Politico Magazine:

It could become ‘the mother of all oil crises’
Gal Luft is co-director of the Institute for the Analysis of Global Security

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If we veer away from trying to open the transportation sector to fuels made from resources other than oil, the party will end with a bad hangover.
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‘Now is the time for presidential candidates to tell us what they intend to do when oil prices go back up’
T. Boone Pickens is chairman and CEO of BP Capital and architect of the Pickens Plan, an energy plan for America

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We have shut down thousands of rigs and shed 200,000 jobs. New investment is non-existent and nations around the world—from the Middle East to Central America, whose economies are wholly dependent on oil exports—are on the brink of economic collapse.

It doesn’t matter whether oil bottoms out at $29 or $27 a barrel. What matters is that, for the first time in a half-century, we look over the horizon and plan for the day when supplies begin to thin, when economies begin to recover and when oil prices begin to move back up.

Now is the time for presidential candidates to tell us what they intend to do when oil prices go back up, probably very quickly. Waiting until that happens and responding with shock and a demand for congressional hearings is just not enough.

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These prices ‘spell the downfall of frail governments’
Terry Lynn Karl is professor of Political Science at Stanford University and author of The Paradox of Plenty: Oil Booms and Petrostates

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On the other, today’s bust is likely to lay the basis for a sharp price spike down the road.

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Low prices have led to painful budget cuts in North Dakota, Texas, Louisiana, New Mexico, Alaska and California; a $300 billion decline in capital investment in future extraction this year alone; the bankruptcies of dozens of energy companies; and the undercutting of incentives to build alternative clean energy.

Most immediately, low prices are a catalyst for the rise in global conflict. Cheap oil translates into huge revenue losses and increased poverty, especially for Russia, Brazil and Mexico but also for Canada. In the 10 OPEC countries where oil comprises more than 85 percent of export revenue, the consequences are especially dire.

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Such a grim prognosis traditionally spells the downfall of fragile governments—and, sometimes, even regimes that appear stable.

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The Islamic State, for example, lives off the earnings from oil fields in Syria and Iraq, and similar dynamics fund Boko Haram in Nigeria and al Qaeda affiliates in Central Asia and the Caucasus.

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Whether oil prices stay too low or suddenly spike, their very volatility perilously whiplashes both winners and losers, destabilizes economies and polities and encourages war—a compelling reason to look for new sources of energy, just in case climate change alone was not enough reason to get off the fossil fuel roller coaster.

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‘Low oil prices are unambiguously good for global welfare’
Robert N. Stavins is Albert Pratt professor of Business & Government, John F. Kennedy School of Government, Harvard University, and director, Harvard Environmental Economics Program

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There can be a major impact on the U.S. motor fuels sector, where the market for biofuels is negatively affected by low conventional gasoline prices. These impacts must be somewhat muted by public policies that subsidize the use of biofuels.

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With gas prices low and natural gas supplies holding down electricity prices in the United States, there has never been a better time to introduce progressive climate policies in the form of carbon-pricing, whether via carbon taxes or through carbon cap-and-trade. Unfortunately, none of us should hold our breath waiting for that to happen. READ MORE