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Persian Gulf members of the Organization of the Oil Exporting Countries see oil prices trapped in the $40 to $50 per barrel range for the rest of 2015.
The reasons behind OPEC’s pessimism on oil prices this year are obvious.
First, credit the glut of oil brought on by Saudi Arabia’s market share war.
Second, the world’s second-biggest economy – China – is slowing down. Demand for oil from the world’s largest importer of oil is softening. Demand will likely weaken further as China completes its current phase of strategic stockpiling of oil.
But what about next year? Will oil prices bounce back in 2016?
One Positive for Oil Prices
The one piece of good news is that global oil production should fall next year.
The International Energy Agency (IEA) said earlier this month it expected non-OPEC oil production to fall in 2016 by the largest amount since 1992.
That makes for a great headline.
But if you look at the actual numbers, the IEA is forecasting a drop in output of only 500,000 barrels a day. That’s a drop in the proverbial oil barrel. Non-OPEC oil production will still be 57.7 million barrels a day.
Still Too Much Oil
The bad news for oil bulls was noted by the IEA: global oil inventories continue to build. Inventories now stand 2.4 million barrels above a year ago. In other words, supply is outpacing demand.
Even the IEA expects this huge inventory will not begin to be drawn down until the middle of 2016, at the earliest.
This huge overhang of oil prompted a new report from Goldman Sachs (NYSE: GS).
In it, Goldman said a worst-case scenario could see oil fall to $20 a barrel in order to clear that massive inventory of oil.
If that doesn’t play out, Goldman sees both WTI and Brent oil in the $45 to $50 range 12 months from now. Goldman pointed to oversupply and weak demand from emerging markets like China as restraining oil prices.
Understandably, most people take what Goldman says with a grain of salt. After all, not that many years ago, it was calling for $200-a-barrel oil.
Biggest Oil Trader Bearish on Oil Prices
But Goldman is hardly alone in its current call.
The world’s biggest oil trader, privately held Vitol, also thinks oil prices are going nowhere fast.
Its CEO, Ian Taylor, gave his views in an interview reported by Bloomberg. He said that rising crude supplies will continue to overwhelm demand. This will keep oil prices in the $40 to $60 range through 2016, Taylor believes.
He was even more pessimistic than the IEA on clearing that huge oil inventory. Taylor said inventories would not clear until 2017 at the earliest.
If Vitol is correct, it means the industry will have to weather a downturn longer than the one experienced in the 2008-09 financial crisis.
The Key Will Be U.S. Shale
I believe Vitol has a real pulse on the market, handling more than five million barrels of oil a day.
This “new normal” of low oil prices will last for longer than what many U.S. shale oil producers currently believe. That’s not good news for anyone betting on an oil price rebound through the popular crude oil ETF, the United States Oil Fund (NYSEArca: USO).
One reason is that Iran will be increasing its oil output in 2016. And it has already said it wants to regain its previous market share position at any cost.
And as I discussed previously, most shale oil producers here in the U.S. still don’t get it.
Most company managements are talking about rig productivity and drilling efficiencies. Lost in all the jargon is the simple fact that, despite the efficiencies, these companies are losing money at current oil prices.
The only major shale player cutting its output is EOG Resources (NYSE: EOG).
The others, led by Pioneer Natural Resources (NYSE: PXD), keep pumping out more and more oil. Pioneer’s CEO, Scott Sheffield, went on record saying that by raising production he thinks he can “outrun” the decline in oil prices.
Shareholders there and other shale oil producers had better batten down the hatches.
Bottom line: While oil prices may stabilize in the $40 to $50 range, any rally will capped around $60 a barrel by the simple fact that still too much oil is being produced.
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