Oil Oversupply

National Commercial Bank looks at the impact of oversupply of oil.

Elevated production levels, decelerating demand, and record high inventories will suppress oil prices to an average of $50/bbl in 2016, the National Commercial Bank (NCB) said in its latest monthly “Views on Saudi Economic and Developments”.

It said growth dynamics pertaining to emerging markets, in particular China, and production factors relating to OPEC have underpinned the bearish view.

The lack of compliance among OPEC members that produced above the 30MMBD quota for the 18th month in a row will be an important drag, especially that the group lacks a unified front.

Saudi Arabia, Iraq and Iran are adamant in producing as much as they can. The Kingdom’s production peaked at 10.6 MMBD in June, while Iraq has increased output over the year by around 0.7 MMBD, reaching 4.2 MMBD in November. Additionally, lifting the sanctions imposed in July 2012 on Iran is expected to bring an additional 500 thousand barrels a day during 1H2016, which will keep OPEC’s production above the 32 MMBD mark. Even though non-OPEC members and high-cost producers will continue to be pressured this year, the anticipated decline in their production will not offset OPEC’s over quota strategy. The IEA, EIA and OPEC have forecasted a decline in non-OPEC supply between 400-600,000 barrels a day, the first annual decrease since 2008, largely due to the steeper decline in US shale production.

The EIA predicted in its latest report that companies operating in US shale formations will reduce production by a record 570,000 barrels a day, which underscores the challenging environment even after slashing capital spending, laying off workers and focusing on the most productive areas.

On the demand side, China is expected to have the weakest economic performance since 1990, with growth falling below 7% for 2015 and 2016 despite the myriad attempts to reduce interest rates, reserve requirements and devalue the yuan in order to spur business activity.

Furthermore, emerging markets are expected to expand at 4%, the slowest pace since 2010 and well below their 10-year average of 7%. Generally, the three eminent organizations are forecasting oil demand to rise between 1.2 and 1.4 MMBD in 2016, much slower than last year that saw demand grow by as much as 1.8 MMBD, a five-year high.

The record US and global crude oil inventories will also continue to weigh on oil markets. The end of year US crude oil inventory at 487.4 MMbbls is 27% more than the level recorded in 2014, which was 388 MMbbls, and is also at an 80-year high for this time of year.

Additionally, the OECD’s commercial total oil inventories rose to around 2.971 billion barrels, near a record level that is equivalent to 60 days of consumption and above the five-year average. Given these aforementioned dynamics, NCB forecast the market to remain unbalanced in 2016.

Source: Saudi Gazette

Oil Consumption Forecast

Barry Norman forecasts oil consumption.

Crude Oil added 45 points as traders bought up the cheap commodity taking advantage of low prices and the hopes that OPEC members will cut production now that Iran has returned to the marketplace combating US exports. Brent Oil added $1.08 to 29.64. Crude oil prices continued to be hurt by bearish sentiments across the globe as markets remain nervous as to how low oil prices can go. Besides, the supply side remains intact further exerting downside pressure on oil prices.

Low oil prices, weak investment demand and low physical demand are push factors for gold prices to trade lower while bargain hunting will provide a push for gold prices in the near term.

The EIA (U.S. Energy Information and Administration) had reported that the global crude oil production will rise to 95.9 million barrels per day (MMbpd) in 2016 and 96.7 MMbpd in 2017. The global crude oil production was at 95.7 MMbpd of crude oil in 2015. The global oil consumption is expected to average 95.2 MMbpd in 2016 and 96.6 MMbpd in 2017.

Meanwhile, the JPMorgan Chase and Goldman Sachs suggested that crude oil prices could test $20 per barrel in 2016. Royal Bank of Scotland suggests that crude oil prices could test $16 per barrel, while Standard Chartered suggests that oil prices could hit $10 per barrel in the worst-case scenario.

Source: FX EMPIRE