A fortnight into 2016 and Goldman Sachs' September prediction of crude oil at $20 a barrel no longer seems quite so alarmist. FTSE 350 oil and gas producers are now faced with a deteriorating market environment in a year in which price hedges will start to evaporate and new production threatens to exacerbate swollen inventory levels.
Estimates vary, but the surplus in global crude markets was running at between 1.5m and 1.8m barrels a day (bopd) at the end of last year. That's with Opec's de facto leader, Saudi Arabia, operating at or near full tilt. US inventory levels for December were well in advance of expectations, while energy demand in both the US and Europe has been held in check due to an unusually mild winter. Inventories are expected to expand in the near term as the seasonal maintenance programmes for US refineries get under way. And, with new barrels in prospect from the National Iranian Oil Company (NIOC), near-term prospects for the oil price are no better than they were a year ago.
Matters aren't being helped by a perceived slowdown in Chinese economic growth; part of the reason why the US Energy Information Administration (EIA) anticipates that demand growth in 2016 will pull back by around 500,000 barrels from last year's record increase of 1.8m bopd. There are also expectations of increased US dollar strength; another negative factor given the greenback's inverse correlation to the oil price. A research report recently published by Morgan Stanley indicates that because of oil's leverage to the dollar, the price of crude could fall by 10-25 per cent if the US currency gained 5 per cent.