Why oil prices will come back to life in 2016

There are glimmers of hope in the Oil Patch.

The painful energy bear market that started about a year ago, and took oil prices to historic lows in August, may be easing up.

oil prices

Oil prices have stabilized in recent weeks and touched three-months highs on October 7.

oil prices
Source: Bloomberg, WTI Crude Oil Price

The iShares Global Energy ETF (IXC) is up about 7% over the last three months as of October 9.

Source: ETF.com

Oil Bulls

True, few see oil prices revisiting the $100-per-barrel levels seen back in 2013 and the first half of 2014.

And many analysts envision a pretty nasty shakeout looming among smaller energy producers, whose credit lines are getting cut and are running out of cash.

That said, some prominent oil market forecasters have issued bullish market calls.

PIRA Energy Group, which predicted the collapse in oil prices last year, sees crude prices rebounding by 40% from around $50 per barrel as of October 9 to $70 per barrel by the end of 2016–and $75 a barrel in 2017.

Source: Bloomberg, Brent Crude Oil Price

Price War

Oil bulls point to lower prices and still-robust demand worldwide.

Saudi Arabia and rival Gulf producers are locked in a price war and production capacity isn’t expanding all that much.

Then there’s China, one of the world’s biggest energy consumers.

While China’s economic slowdown continues, its equity markets appeared to have stabilized.


The Chinese are also stockpiling oil at a furious pace, a trend that’s supporting oil prices.

Through the end of July, China accumulated about half a million barrels of crude in excess of its daily needs, the most for the period since 2012, according to data compiled by Bloomberg.

China has hoarded about 200 million barrels of crude in its reserve so far and aims to have 500 million by the end of the decade, according to the International Energy Agency.

Source: Bloomberg Business
Source: Bloomberg Business

Supply and Demand

Supply is starting to tighten, although slowly.

US production fell to 9.3 million barrels a day in June, down roughly 3% since 2015 oil output peaked in April.

According to Citi Research, capital constraints could help push output down by 500,000 barrels a day by the end of 2015.

Jonathan Waghorn, co-manager of the Guinness Global Energy fund, predicts oil demand will exceed oil supply by the latter half of 2016.

“Supply and demand convergence is coming and, all things being equal, demand will outpace supply in the second half of 2016. With little spare oil production capacity in the world at that time, the global oil inventory overhang will get worked off and oil prices will have to be stronger to incentivise investment in new production.”

Another factor supporting oil prices is the rising geopolitical risks in the Middle East, what with Russia now involved in Syria’s military conflict.


Energy investors have taken some hits over the last year or so.

But there’s evidence that energy demand and supply are starting to align again.

Prominent energy analysts see oil prices starting to firm up in 2016 and 2017.

Photo Credit: Kevin Cole via Flickr Creative Commons