Oil Rebound To $60s Coming In 2016
Energy expert shares his views on the oil market.
Michael Cohen is head of energy markets research at Barclays. He is responsible for the firm’s research covering developments in North American energy markets and the firm’s oil and natural gas forecasts. Prior to his role at Barclays, Cohen worked as a senior member of the Oil Industries and Markets division at the International Energy Agency (IEA) and as an economist at the Energy Information Administration (EIA). ETF.com recently caught up with him to discuss the latest developments in the oil market.
ETF.com: Do you think these low oil prices are sustainable?
Michael Cohen: We've seen a regression back down toward the lows we saw in January. In our view, in the near term, it’s likely to stay this way to fully rebalance supply.
However, we don’t think the current price levels are sustainable for medium-term growth of supply in order to meet the demand that has been spurred on by these lower prices. Therefore, we expect we’ll see an adjustment back up into the $60 range in the second half of next year, and that that price level is going to be required to have enough supply to meet demand.
ETF.com: So we're looking at a rebound ahead, but in the near term, have we bottomed?
Cohen: It’s still too early to say whether we’re really out of the woods yet. Our baseline price forecast indicates we’ve bottomed on a quarterly average basis. But we see particular concerns as we move into the refinery maintenance season globally.
If the level of maintenance we have is higher than the market expects, that could conceivably move the price of oil down below where we are now. That would be one scenario.
The second scenario is one in which China continues to stumble instead of growing at the rate that the market expects―between 5 to 7 percent. If it grows by a much lower 3 to 4 percent, that could have ramifications for other Asian economies and other economies that trade with China. That's the kind of scenario in which we could see another dip below where we are even right now. That’s not part of our base case, but it's a possibility.
ETF.com: On the supply side, it seems maybe that the U.S. output is topping out. According to the EIA weekly data, it’s down almost 400,000 barrels per day from the top. What's your take on that?
Cohen: Over the next two to three months, we’re likely to see supply continue to decline. However, once the market realizes it needs U.S. shale output to continue to grow at a decent pace of 100,000 or 200,000 barrels a day per year, there will be a price impact later on in 2016.
Cohen: Once that happens, you could get U.S. crude output back up to 9.6 million or 9.7 million barrels a day. We don’t really see a scenario in which U.S. production declines steeply because there will be a market impact from that.
Most of the U.S. producers that are sitting on a backlog of wells that they want to complete and bring on will do so at higher prices. By doing that, they’ll support overall output and mitigate the decline from existing fields, and there won’t be a steep trajectory down.
ETF.com: So by 2016, oil prices should be much higher?
Cohen: For WTI, we see prices at $50 in Q4 of this year and in the mid-$60's by the second half of next year. That mid-$60's level for WTI is the number that we think is needed to have U.S. shale production continue to stay stable and even grow in the medium term.
ETF.com: Do you think Iran’s re-entrance into the oil market is going to have an impact on prices?
Cohen: It definitely will. What the market is struggling with right now is trying to understand how much incremental oil Iran can actually sell to the market when it does come back. The market has gotten a little ahead of itself in assuming that it’s a done deal that Iran is able to sell the same kind of levels of exports that it was able to in 2012, before some of the major sanctions were tightened on the country.
The forward curve and the price of oil are all reflective of the fact that Iran is likely to add anywhere from around 500,000 to 700,000 barrels a day from current levels to the market. If for whatever reason we see a slip in when implementation of the Joint Comprehensive Plan of Action [nuclear deal] occurs, then the market would conceivably have to readjust the assumptions about the incremental exports from Iran.
And likewise, if Iran complies and there is a blue-sky scenario in which it adds 800,000 barrels a day or 1 million barrels a day of oil to the market by the end of 2016 or early 2017, then that would probably exceed the market’s current expectations, and we could see further downside in prices.
That said, a lot of Iran’s contribution―whatever it may be―is priced in. That was one of the reasons we saw the sell-off in oil prices starting from the beginning of July.
ETF.com: Do you see geopolitical risks from these low oil prices? Could Saudi Arabia or Russia or another country become destabilized if prices stay low?
Cohen: Certain countries are able to weather these prices. Russia and Saudi Arabia are some of those that fall on the spectrum of being best prepared for this kind of environment. Then there are other countries on the complete other side of the spectrum—like Libya, like Nigeria, like Iraq—that are much worse prepared for a lower-for-longer price environment.
The potential for geopolitical instability in Iraq is something we spent a lot of time focusing on. We see the rise of ISIS in that country, the sabotage on energy infrastructure, and the inability of the government to continue to pay companies back fully for the investments they’ve made.
The same kind of thing is happening in Libya. Those two countries are the ones most at risk.
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