The Oil Outlook for 2016
February 9, 2016
About a year ago we wrote in this space that oil prices would continue to go down. We suggested that $35 was possible for a bottom for West Texas Intermediate price, but thought it would hold around $50 or $60 per barrel. (WTI closed on February 9 at $28.39, down 26% since New Year’s Day.)
We pointed out that the EPA had not defined the Renewable Fuel Standard for 2014 or 2015 and hinted that the Keystone Pipeline would be approved.
We also said that lower prices would lead to increased demand for gasoline and diesel. Indeed, the EIA reported that U.S. gasoline consumption was up 2.8% in 2015 over 2014 and California gasoline consumption, despite relatively high prices, was up 3.4%. Interestingly, EIA has distillate fuel (diesel and heating oil) demand down 2.0% through ten months. They expect gasoline consumption to increase by 0.8% in 2016. Distillate fuel demand will grow by 2% over the next two years with the improving economy.
Our crude oil price forecast for 2016 is continued weakness until production starts to decline or the world economy picks up to the point where excess inventories are drawn down. We see major support at around $25 per barrel, but if that doesn’t hold, then around $18 is the next support. The Saudis are determined to defend their market share from losses from Iran, Russia, and the U.S. drillers. We don’t see crude oil prices bottoming until the back half of the year, potentially not until the fourth quarter.
Customers in the crude oil production space, like drillers or their service providers, will have a very tough year. One of our friends, a small producer in California, pointed out that his sales price has crashed from $94 to $18 in eighteen months. He is slashing his expenses to the bone in order to have a hope of staying in business. Look for a lot of M&A in this space as the strong companies pick up the weak ones. On the other side, refiners are enjoying strong margins as crude oil prices drop faster than product prices. This is likely to continue until crude oil prices turn around.
On the regulatory side, it took until last November before the EPA was able to publish the Renewable Volume Obligations for ’14, ’15, and ’16. They essentially signed off on the actual demand in the past and upped the ante in ’16. This action will start to dry up an overhang of RINs inventory, leading to a tight supply/demand balance in ’17 and probable shortfalls in ’18. This will lead to higher RINs prices in the later years, supporting the transition to blends beyond the E10 Blendwall. It will be interesting to see this year how companies position themselves to create competitive advantage within these rules.
California implemented Cap & Trade for transportation fuels in 2015, which resulted in a 10-12 cpg increase in rack prices. This “tax” was designed to make fuel more expensive, reducing demand and raising funds that are being used for high speed rail and alternative fuels projects. California’s LCFS was re-authorized to address the deficiencies from a Court ruling. Cap & Trade and Low Carbon Fuel Standard “taxes” will increase in 2016. Oregon is the next state with LCFS but it is unclear how this will impact prices.
Keystone didn’t get approved and won’t until the Administration changes.
So the outlook for 2016? Continued pressure on crude oil prices that translates to higher transportation fuel demand. Auto manufacturers are likely to be busy selling big cars and trucks while fuel efficient vehicle sales will suffer. Southern California gasoline prices will continue to be relatively high until the ExxonMobil Torrance refinery comes fully back on line sometime in the spring.
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