Bearish outlook for oil prices for this year and 2016

Inflation is unlikely to flare up again as long as commodity prices remain depressed. Inflation helps countries, companies and households that have high debts to pay them off because it reduces the value of the debt, so without it the world is slowly walking into a debtors’ nightmare.

Because of the debt-fuelled bubble, it looks like what should be a good thing for growth – low commodity prices – has turned into a drag.

The most important of commodities is, of course, oil. The fall in the price of oil has contributed to falls in other commodity prices and in those of some manufactured products because of the pass-through effect of lower energy costs.

It doesn’t look like oil prices will resume an upward trajectory any time soon.

Analysts at Societe Generale have just cut their forecasts for the price of oil for this year and the next, with what they see as “bearish” factors weighing on supply.

They cut their forecast for NYMEX-traded West Texas Intermediate (WTI) crude by $12.20 a barrel to $47.80 for the end of the third quarter this year, by $7.50 to $52.50 for the end of the year and by $5 to $55 for 2016.

ICE-traded international benchmark Brent’s price outlook was also cut by $11.90 to $53.10 for the end of the third quarter, by $7.50 to $57.50 for the end of this year and by $5 to $60 for next year.

“The matter is simple: there is too much oil supply,” says Michael Wittner, a commodity analyst at Societe Generale.

The main reasons for the downward revision in forecasts are the more resilient production of oil in the US, a surge in output from OPEC countries and a gradual increase in supply from Iran expected for next year.

Oil Prices and Production

Oil prices to stay depressed as OPEC production rises. Source: Societe Generale

Crude production by OPEC jumped by 1.6 million barrels a day since last November, almost exclusively due to increases in Saudi Arabia and Iraq.

Over the period, output by Saudi Arabia increased by one million barrels a day while Iraq’s output increased by 0.7 mb/d, to a total of 1.7 mb/d.

Regarding US output, while it is true that shale oil has been falling due to some companies closing down because of the fall in prices, production has increased in the Gulf of Mexico, offsetting the impact on overall output.

On Iran, while there are still uncertainties over the outcome of negotiations, the analysts at Societe Generale assume the country will see sanctions on the oil and banking sector lifted in the first quarter of next year.

After the lifting of the sanctions, they expect sequential increases in Iran’s oil output of 200,000 barrels a day starting in the second quarter of 2016 and continuing all through the first quarter of 2017.

“Iran is ‘in the mix’, it adds uncertainty, and does contribute to the more bearish fundamental outlook,” says Wittner.