Barclays White Paper predicts oil price of US$60 per barrel in 2016

November 25, 2015

LONDON - Barclays Corporate Banking has released a White Paper which predicts global oil prices recovering to US$50 per barrel by end-2015 and to US$60 per barrel in 2016, spurred on by a sustained doubling of growth in global demand up to four million barrels per day. “Such a price rise would be sufficient to incentivise US shale growth and is supported by consumer sensitivities and storage link buying,” the White Paper says.

The findings come out of a closed-door discussion with an influential group of industry professionals hosted by Walter Cumming, Head of Oil and Gas at Barclays, and Niall Handy from Barclays UK Corporate FX Team, along with a number of the Bank’s FX and oil price strategists.
The group discussed the previous oil price crash of the 1980s and how this compared to the current fall, with the challenges of supply and demand recurring as a major theme. Discussion also focussed on the current strength of the US dollar and the impact it may have on the overall outlook for the industry.
Since OPEC decided in November 2014 against reducing production, global oil demand has recovered strongly from a point where it was growing below the trend rate of 700,000 barrels per day.
The estimated fragility of global demand was a contributing factor to OPEC’s decision not to cut production, the White Paper says.
“Since then, the global demand growth rate has tripled to 2.1 million barrels per day, due mainly to elasticity in price and consumer reaction.” The industrial sector has played little part in this demand growth; the drive has come from the end consumer.
However, the positive story of a tripling in demand growth has been overshadowed by the extent of the increase in oil supply, with OPEC production up at 32 million barrels per day.
Barclays forecasts that the excess supply situation will continue throughout 2015: Saudi Arabia is producing close to record levels at 10.3–10.4 million barrels per day, while Iraq continues to be a strong supplier.
The White Paper says there are a number of fundamental differences between the current oil crash and that of the mid-1980s.
During the earlier period, OPEC’s spare capacity was between 14% and 16% of global oil demand, which meant OPEC was in a much stronger position to influence supply. Today, OPEC’s spare capacity stands at less than 4%.
While Saudi Arabia is producing close to record levels, it is not expected that the Saudis would break the 11 million barrels per day barrier, which creates a limitation on the amount of oil OPEC can produce, and therefore the influence it ultimately has.
The second variance lies with non-OPEC supply and how much more flexible this is today compared to the 1980s. Throughout the previous period, supply could not be altered as quickly as it can be today, especially in the large capital-intensive projects of the time.
The US shale industry, with its lower cost base and rapid set up characteristics, has taken over from Saudi Arabia as the new swing producer. The sector is very reactive to the price of oil and can adjust its production reasonably quickly.
“Despite initial resilience, Barclays anticipates a significant reduction in the supply of US shale in the fourth quarter of 2015 as well as the first half of 2016. This is where we expect the industry will see the real battle between global supply and demand take place,” the White Paper says.
“Linking all these factors together, Barclays predicts that global oil demand will grow above the current trend of 1.2-1.3 million barrels per day to a total of four million barrels per day added to the market between 2014 and 2016.”
Looking ahead, the industry expects to see a draw-down in oil supplies, which Barclays predicts will result in an average oil price of $60 per barrel.
“This price level is expected to incentivise the appropriate amount of US shale supply to grow: if the sector experiences negative growth it will leave the market very tight, but production levels will most likely reduce from one million barrels per day to 200,000–300,000 barrels a day growth rate.
“A higher commodity price, for example of $70 a barrel, would trigger a further increase in the amount of shale supply into the market and would once again tip the balance towards over production: $60 per barrel in 2016 would support a sustainable level of growth,” the White Paper says. (ATI).