Oil prices expected to rise in 2016

Crude oil prices are expected to move higher in 2016, even though near-term oversupply has driven crude oil benchmarks towards multi-year lows. OPEC’s unexpected resolve at its December meeting to focus on sustaining volumes rather than supporting prices has added further downward pressure to prices.

Nevertheless, there is a case for crude oil prices to rise over the coming year. Geopolitical risk in the Middle East and North Africa, key areas of crude oil production, is increasingly raising insecurity around supply. Also, many of the factors that have weighed on prices could fade in 2016.

These include:

  1. Fears of a hard landing in China, which now look exaggerated
  2. An overestimation of the extent and speed at which post-sanction Iran can begin to export oil.

However, many questions remain unanswered. In particular, how fast and at what price could US shale production pick up again after peaking in May 2015, possibly adding a burst of new supply just as prices begin to recover? That is looking less and less likely as US shale producers come under strain as production hedges expire.

Meanwhile, the effect of current OPEC policy to maximise production and market share, at the cost of spare capacity, might ultimately lead to a spike in crude oil prices if it leads to less supply in the long term.

These two themes supplement some of the issues already affecting the crude oil markets, and suggest that price volatility, which in 2015 hit its highest since the global financial crisis, will remain high in 2016.

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