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Energy Outlook: Excess Supply, Low Prices to Continue in ’16

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The price of crude oil hovered near the 11-year-low mark of $36 per barrel for much of December. But despite a slight rise in oil prices on Tuesday, news for energy prices could get worse in the year ahead, with the IMF predicting that oil could drop as low as $20-$30 per barrel in 2016.

This trend — the risk that oil surprises to the downside — is among the top risks for investors next year, says Goldman Sachs Global Investment Research in its “Outlook 2016” report.

What’s driving such dire predictions? According to Jade Fu, an investment manager with the London-based Heartwood Investment Management, oversupply is hammering the energy market and is likely to “be a persistent theme” in 2016.

OPEC’s latest estimate is that the world’s oil glut is roughly equal to 2 million barrels a day, representing nearly 2% of global demand.

“More recently, financial markets have been particularly frustrated by indicators showing that U.S. stockpiles remain elevated. Market consensus forecasts, however, suggest that while the supply surplus is expected to continue until at least the latter part of next year, excess oil inventories should begin to decrease over the course of the year,” Fu explained in his ’16 outlook analysis.

Eventually, this process should lead to “a more balanced scenario towards 2017,” he states. However, the investment group is “not expecting any meaningful and sustained move in either direction, at least in the first half of 2016.”

Volatility Ahead

The U.S. Energy Information Agency, in its latest monthly analysis, says oil futures and options contracts “continue to suggest high uncertainty” in the outlook for prices. West Texas Intermediate (WTI) futures contracts for March 2016 delivery, for instance, traded at about $44 per barrel in early-December, with the implied volatility of the commodity averaging 42%.

This means traders anticipate a price range for WTI of between $30 and $63 per barrel (vs. a range of $51 to $89 per barrel a year earlier). And the price spread widens over time, EIA reports, with a range of $26 to $90 per barrel anticipated for December 2016.

“EIA’s crude oil price forecast remains subject to significant uncertainties as the oil market moves toward balance …,” the group explained. “The oil market faces many uncertainties heading into 2016, including the pace and volume at which Iranian oil reenters the market, the strength of oil consumption growth, and the responsiveness of non-OPEC production to low oil prices.”

Moody’s View

Moody’s Investors Service recently cut its 2016 oil price outlook to reflect the prolonged supply glut. It expects additional production from Iran, should sanctions be lifted, which would offset any slowdown in U.S. output.

The ratings agency cut its 2016 Brent price assumption by $10 to $43 per barrel and its WTI price forecast by $8 to $40.

Looking further ahead, it predicts prices for both benchmarks would increase by $5 per barrel in 2017. Moody’s also lowered its forecasts for Henry Hub natural gas prices by 50 cents per million British thermal units to $2.25 in 2016.