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Travis Hoium: 4 oil trends to
be on the lookout for in 2016


IEA

Where are oil prices going to be a year from now?

These four trends could give a hint.

It's been a wild decade for oil markets. Ten years ago, oil prices were climbing as the global economy boomed and there seemed to be no alternative to the oil we were all hooked on. 

Since then, prices have peaked, crashed, peaked, and crashed again. What should we expect oil prices to do in 2016? No one knows for sure, but here are four things to watch for. 

Travis Hoium : Don't look now but oil supplies from U.S. drillers are sinking quickly while gas guzzling SUV buyers are pushing demand for oil higher. The supply and demand imbalance that has led to oil prices below $50 per barrel for most of the last year may soon be over.

The U.S. Energy Information Administration reports that U.S. crude oil production fell a whopping 140,000 barrels per day between July and August and production in 2016 is expected to fall 400,000 barrels per day to 8.8 million. That's about 1 million barrels per day lower than the country's peak production rate.  

Meanwhile, demand for oil domestically is growing again. Between 2005 and 2012, oil demand dropped 11.1% to 18.49 million barrels per day. But in the first eight months of 2015 that figure has risen to 19.52 million barrels per day and the last two months of the summer saw demand jump above 20 million barrels per day for the first time in years.  

China is also expected to grow demand for oil for each of the next three years, despite its economic slowdown. The world may be oversupplied with oil by about 3 million barrels per day right now, but with supply dropping and demand rising that narrative might not last long. Rising oil prices could be here sooner than you think.  

Jason Hall : Hydraulic fracturing and horizontal drilling are two key technologies that led to the ongoing North American resurgence in oil and gas production. As producers have refined these techniques, both the time and cost to produce oil has fallen sharply over the past several years. 

But cheap oil has forced oil producers to develop ways to get more oil out of the ground with less money, and eventually there won't be any more efficiency gains using current techniques. But refracking is one new innovation with huge potential to change the game again, and further reduce production costs. 

Here's a short history of why this matters: Traditional oil wells have a shallow decline curve, while fracked wells fall off very sharply in the first year, before leveling off. Because of this, producers have been forced to actively drill new wells just to maintain production from year to year. When oil was $100, no problem. 

At $50 or less, many companies can't make money drilling new wells. But if they can refrack  existing  wells, the math gets notably better. In short, refracking a well may not net as much oil as drilling a new one, but it costs millions of dollars less. 

What it boils down to is this: How much -- per barrel of oil produced -- will refracking cost? If it's less than the cost of a new well, then it will be hugely successful. Whether or not it will be is something we'll find out in 2016. 

Adam Galas : What I'll be watching is how quickly and to what extent Iran who just reached a historic nuclear deal with the West that will lift oil export sanctions -- can increase and export production of its crude into a world market that is already awash in oil. That could have a huge influence on how low oil prices eventually drop and how quickly they recover. 

Currently the International Energy Agency or IEA, estimates the world has an oil glut of 3 million barrels per day with supply still growing at a "breakneck pace" even with oil prices down about 60% from their June 2014 highs. (1)The IEA estimates that without additional Persian production global crude supply and demand should approximately balance by the end of 2016.(2) 

However, according to Interfax News Iranian oil minister Bijan Zangeneh has indicated his nation's willingness to come out swinging in the global war for crude market share, oil prices be darned. 

We will increase production at any cost, and we have no other alternatives. If oil production is not increased quickly, we will continuously lose market share.

Mr. Zangeneh told CNN that by the end of 2016 Iran will increase production to 4.2 million bpd, which is a 1.4 million bpd increase over its current production rate. Only time will tell whether or not Iran can accomplish its lofty production growth goals, and what kind of effect that will have on crude prices, given the hundreds of other variables that affect global oil markets. 

One thing is clear however, Iran plans to become a much bigger player within OPEC and that means US energy investors need to be prepared for 2016 to be another potentially painful year for short-term share prices. 

Rich Smith : I've got my eye on the oil storage market. We've been hearing for months -- years even -- about how oil storage tanks were filling up with drilled but unsold oil. But a recent report out of the U.S. Energy Information Agency just highlighted yet another new peak.

According to US EIA , U.S. oil inventories are now at levels "not seen for this time of year in at least the last 80 years." That could be a problem for oil prices, because we're entering the time of year where refineries historically have tried to top up their tanks in preparation for the winter chill. With oil already near to overflowing the tanks, however, there may soon be no place to put the oil that producers are presumably planning to produce -- which could give them an incentive to lower prices just to push the oil out the door.

Now, there are alternatives to this: Building more storage tanks, for example, or storing oil in offshore tankers. But the supply of tankers is limited, and most of the storage tanks now under construction to alleviate the "storage glut" aren't expected to become operational before mid-next-year. Congress is also considering  lifting the 40-year-old ban on exporting most domestic crude oil. But again, even if that happens, it's not likely to happen till next year.

All in all, it's shaping up to be a turbulent next three-to-six months for the U.S. oil industry. Investors' best hope may be for a long and cold winter.

Travis Hoium has been writing for fool.com since July 2010 and covers the solar industry, renewable energy, and gaming stocks among other things.Petroleumworld not necessarily share these views.

Editor's Note: This commentary was originally published by The Motley Fool on Oct. 15, 2015. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld News 12/28
/2015

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