Oil Price Forecasts Say Lower for Longer – 2/6/16

Oil price forecasts disappoint those hoping for a return to triple digit prices. With executives and advisers predicting years of $40-$60 a barrel price ranges, a strain of pessimism has hit the oil industry following months of OPEC inaction and slowing demand growth in China.

Starting at the individual level, several oil CEOs are predicting a bleak future for oil producers.

Diamond Offshore Drilling CEO Marc Edwards, whose company reported a loss of $274 million for 2015, opened up about the uncertainty facing the offshore drilling industry during the company’s quarterly earnings call. Stating that “the oversupply could persist well into 2017 and beyond”, Edwards suggested that the laws of supply and demand would eventually put prices at more reasonable levels and that “Deepwater drilling will recover… What I can’t tell you is when.”

Similar thoughts were expressed by Vitol Group BV CEO Ian Taylor who, in an interview with Bloomberg, said he predicted oil to bounce between $40 and $60 a barrel for five to ten years. The energy trader also expressed his doubts about the chances of oil ever reaching its triple digit highs again referencing more efficient usage and weak emerging market demand.

Investment firms have put out projections even more dire than those given by industry executives.

Goldman Sachs Group Inc. has predicted prices could drop below $20 a barrel before reaching a stable price above $40 later in the year. The head of Goldman’s commodities research division cited breaches in storage capacity as possible source of price volatility for the next 6-9 months and increased production by Iran and Iraq as a source of further price loss risk. Meanwhile, Morgan Stanley has slashed its oil price forecast by 50% for 2016, putting expected prices below $30 a barrel for the next 6-12 months. Analysts with the firm see the combination of the OPEC cartel’s refusal to cut production and insufficient demand as the primary drivers of low oil prices. A survey of economists and strategists conducted by Bloomberg put out a median forecase of $48 per barrel.

The International Energy Agency oil market report shows a modest drop in non-OPEC output, primarily from Europe, China, and the US, which was partially offset by increased OPEC output from Saudi Arabia, Iraq, and Iran. The report expressed doubt in the possibility of a significant price rebound in the short term. And suggested that “risks to growth in Brazil, Russia, and of course slower growth in China” would be drags on demand growth.

As highly leveraged firms try to meet debt obligations closer to the middle of 2016, output may actually increase before it comes in line with demand.

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