Oil Prices To Remain Low Into 2016
Oil prices are set to remain low through 2016 as worldwide oil production remains high and combines in a perfect storm with record crude and refined product stocks, a persistently weak global economy and the expected rise in U.S. interest rates.
This was the prediction made by Patrick Pouyanne, CEO of French oil multinational Total, as well as investment banks such as Goldman Sachs. As oil is priced globally in U.S. dollars, a rise in the dollar’s value following the Federal Reserve’s expected hike in interest rates means that the dollar oil price will fall.
Lower Petrol Prices
Crude and refined product stocks remain high because of low demand during this year’s mild winter, an effect of the periodic El Nino climatic phenomenon.
This is good news for U.S. Consumers, who are now paying less than US $2 per gallon for petrol, compared with a British equivalent of US $4.5 per gallon at the current relatively low U.K. prices of £1.07 per litre. The price difference is due to British, and other European governments, slapping taxes on petrol sales.
Major oil producers such as Saudi Arabia and Russia are pumping as much oil as they can to maintain their overstretched budgets while U.S. shale oil production remains high.
Federal Reserve’s Interest-Rate Hike
Low interest rates in the U.S. fuelled the American shale oil boom in the aftermath of the 2007/2008 financial crisis. The December interest rate rise may withdraw some of this from the over-leveraged, capital-intensive shale sector. But if a fall in shale oil production contributes to a slight global oil price rise, the more capital-efficient U.S. drillers will be able to pick up the slack by resuming production operations.
Iran’s Production Promises
After OPEC’s early December meeting, the Iranian government claimed that it could export an extra 500,000 barrels per day once United Nations sanctions are lifted against the country in February 2016. Tehran also claimed that extra export volumes could increase later in 2016.
Decades of under-investment in Iranian oil production because of the U.N. sanctions mean that such export volumes may not be achieved until the medium term. In addition, the country’s ambition of soon producing five million barrels per day remains a fantasy until the country can attract major Western investors – something that is opposed by the Iran’s Revolutionary Guards, the military elite that controls Iran oil industry as well as huge chunks of the economy.
But more Iranian crude will still hit the world market. Here it will be joined by U.S. crude oil exports, as Congress is expected to repeal that country’s oil export ban imposed during the oil supply crisis of the 1970s.
The lifting of the U.S. export ban will have a major effect on many OPEC oil producers – especially Nigeria, a country that produces crude similar in quality to the U.S.’s sweet, light variety.
The oil supply glut in the Atlantic Basin over 2016 has to be balanced against continuing U.S. oil imports of over seven million barrels per day, but prices will stay low.