Five important questions - and answers - on oil prices in 2016
While the oil price is expected to rise this year, geopolitics will play a key role for oil markets after several years of absence.
Geopolitics along with lacklustre global growth, a stronger dollar and an OPEC firmly determined to maintain market share are the factors most likely to influence oil prices in 2016. Below, senior analyst Christin Tuxen from Danske Bank Markets gives his views on where the oil price is headed and the challenges facing the market.
1. What is your short-term view on the oil price?
“We expect oil (North Sea crude) will continue to trade at USD30-50 per barrel in Q1 and going into Q2. That is a wide range, but also an acknowledgement that the oil market is no longer as stable as before. We actually see prices trading in this range for some months yet, as there is no obvious trigger to send prices higher in the short term.”
2. What are your long-term expectations for the oil price?
“Current oil prices will soon begin to hurt non-OPEC producers so much – given their relatively high costs – that production will start to slow, allowing the OPEC countries to maintain their present levels of production. Prices will then begin to stabilise or rise slightly, and we see North Sea crude trading above USD50 per barrel by the end of 2016.”
3. What might be the impact on global oil markets of the US resuming oil exports after a 40-year ban?
“One noticeable effect it has already had is to completely close the gap between the US reference oil (WTI) and North Sea crude. This price spread has previously been very significant, if narrower in recent times. However, the decision by the US Congress to end the export ban was the deathblow to the spread, which is now completely gone. As a result, US oil can now flow more directly into the global oil market, potentially putting downward pressure on oil prices in the short term, though the impact should not be particularly pronounced, as the US will remain a net importer of oil. Essentially the decision to resume exports probably has more significance from a historical or emotional perspective. Lacklustre global growth, a potentially firmer dollar and OPEC determined to secure its market share by maintaining production are far more important factors for the oil market right now.
4. There is speculation that Saudi Arabia may drop the Saudi Arabian riyal’s peg to the dollar. What will that mean for the oil price?
“Saudi Arabia is experiencing an income squeeze. So far, the country has chosen to cut public expenditure rather than devalue its currency. Dropping the peg could be slightly negative for the oil price, as this would underline the Saudi’s determination to maintain high levels of production.”
5. Tensions between Saudi Arabia and Iran have increased in recent days. What might a further deterioration in relations mean for risk premiums in the oil market?
“Geopolitics has not been factored into the oil price for quite some time, but that could quickly change – just as we saw in connection with the Arab Spring. At that time, geopolitics accounted for around 10 dollars of the oil price. The recent flare up could bring geopolitics back into the picture again in 2016 and prices could jump on the back of a wider conflict. The oil market has been lulled into a sleep of sorts in recent years – because production has been so high, we have forgotten that it can be hit from one day to the next or that the Suez Canal can close. Geopolitics has slipped off the radar, but deteriorating Saudi-Iranian relations may serve as a timely warning that geopolitics should not be ignored.”
