Why Oil Prices Will Rebound in 2016
Business + Economy

Why Oil Prices Will Rebound in 2016

© Kevin Lamarque / Reuters

The plummeting prices of oil and gas roiled markets and affected businesses, investors and drivers in 2015. Whether prices rebound or not is bound to have a similar impact this year. Prices shot up briefly on Monday as investors worried about a potential supply disruption as a result of heightened tensions between oil producers Saudi Arabia and Iran, but weak economic data from China erased the gains.

So which direction will prices go from here? Will concerns about demand from China and other weakened economies combine with an ongoing supply glut to further drive down crude futures? 

Phil Flynn, senior energy analyst at The PRICE Futures Group, lays out a bullish case — and it doesn’t just rest on crisis in the Middle East.

His argument that prices will rise after two down years starts with reasons that the global oil glut might be curtailed. For one thing, producers are pulling back in response to lower prices. “The Wall Street Journal is reporting that Tudor, Pickering & Holt, an energy-focused investment bank, has tallied 150 projects that have been delayed, resulting in an estimated 13 million barrels a day of oil production deferred indefinitely,” Flynn wrote to clients on Thursday, noting that the crude that isn’t flowing represents 15 percent of total global output.  

Related: Why Oil Prices Could Really Collapse to $20 a Barrel in 2016

“Capital spending cuts as well as the normal rate of production decline is hitting the market,” the analyst says.

And the added supply expected from Iran might not materialize, he adds. The U.S. is now considering imposing more sanctions on Iran, which could spell trouble for the return of Iran’s oil to the market — though tensions with Saudi Arabia could also mean that the two countries won’t work in concert to limit production.

Flynn argues that, when Iran does eventually re-enter the market, there will be questions as to how much oil it can produce consistently given a lack of investment in its oil fields. On top of that, he doesn’t believe that Saudi Arabia is going to produce much more oil next year than it has this year. “They say they’ll add more, but how much more can they? How much more could they add?” Flynn says. 

Related: As OPEC Loses Control, There’s a New Power in the Oil Market 

Also, production from other OPEC countries might fall. Producers in Venezuela, Mexico, Algeria and Nigeria are postponing projects that are necessary to reverse the natural depletion of oil fields and even though production is improving in Libya, Flynn questions how sustainable it is due to the volatile political situation there.

On the other side of the supply/demand equation, the consumption of gasoline in the U.S. is rising sharply. Demand for gas grew at the highest rate in 30 years, Flynn says, while global demand growth was the strongest in over a decade.

“We’ve priced in weaker demand than we think [exists],” Flynn says.

Flynn predicts that next year will see an even greater jump in demand and it’ll become the driving force that pushes gas prices up from their current average of $2 a gallon to around $2.25 by April. 

Flynn likens the current situation to the last time oil had back-to-back losing years, which was in 1997 and 1998, when prices fell over 30 percent. The following year saw a colossal rebound as oil prices more than doubled. “History could repeat itself,” Flynn says, as “crude oil is getting ready to party like its 1999.”