ABA Banking Journal - May/June 2016 - (Page 20)
> ECONOMIC OUTLOOK
High Inventories, Low Demand
Will Continue to Keep Oil Prices Down
BY BRITTANY KLEINPASTE
CONTINUED INCREASES IN global inventories have put significant
downward pressure on oil prices since mid-2004. With global inventory
build-up likely to continue in 2016, and against slow global growth this
year, upward pressures on crude oil prices will be weak at best.
The U.S. Energy Information
Administration estimates that global
oil inventories increased by 1.9 million
barrels per day in 2015, marking the
second consecutive year of inventory
builds. High levels of global production
have exceeded growth in global oil
consumption, pushing oil prices to the
lowest monthly average levels since
mid-2004. The EIA expects inventories
to continue to rise in 2016 by an
additional 700,000 barrels per day and
does not expect the first draw on global
inventories to be until the third quarter
of 2017. As long as the oversupply
exists, oil prices will remain depressed.
Much of the 2015 growth in oil supply
has occurred in North America.
According to the EIA, U.S. production
of crude oil averaged an estimated 9.4
million barrels a day in 2015. However,
low oil prices have already lowered
drilling rig counts and will continue to
do so, thereby dropping production
levels. The expectation is that production
levels will decline to an average 8.7
million barrels per day in 2016 and
8.5 million barrels per day in 2017.
These domestic declines largely reflect
a slowdown in onshore production.
However, productivity improvements,
lower breakeven costs and anticipated
oil price increases in the second half
of 2017 are expected to reverse the
falling onshore production trend.
ABA BANKING JOURNAL | MAY/JUNE 2016
Oil imports dropped dramatically as
domestic oil production gained steam.
In fact, the share of total U.S. liquid fuels
consumption met by net imports fell
from 60 percent in 2005 to an estimated
24 percent in 2015. The net import
share is likely to remain flat in 2016 but
increase slightly in 2017 in response
to the decline in domestic production,
reversing the trend that began in 2005.
The U.S. Energy
that GLOBAL OIL
INCREASED by 1.9
million barrels per day
in 2015, marking the
second consecutive year
of inventory builds.
The price of West Texas intermediate
crude will rest within the $30 to
$40 range through most of 2016,
according to ABA's Economic Advisory
Council, a committee of 15 chief
economists from among the largest
banks in North America. As inventory
levels adjust and global growth
improves, the EAC expects prices to
begin to climb later in the year, reaching
$45 per barrel by the fourth quarter,
with a gradual increase into 2017.
The values of futures and options
contracts support this prediction, but
also suggest high uncertainty in the
price outlook of oil. For example, West
Texas Intermediate futures contracts for
April 2016 delivery, traded during the
five-day period ending Jan. 7, suggest
crude oil prices will range from $25 to
$56 per barrel. Periods of heightened
volatility this year will reflect the pace and
volume at which Iranian oil reenters the
market, the strength of oil consumption
growth and the responsiveness of nonOPEC production to low oil prices.
Even with the pain suffered by oil and gas
producers and servicers, consumers have
realized significant benefits. For example,
the price of U.S. retail regular gasoline
averaged $2.43 per gallon in 2015-
down from $3.70 in 2014-and the EIA
expects monthly retail prices of U.S.
regular gasoline to reach a seven-year
low in early 2016. Even with pump prices
likely to rise in the spring-to a forecasted
average $2.03 per gallon for retail regular
gasoline in 2016 and $2.21 per gallon in
2017-consumers will realize as much as
a $550 savings on gasoline this year. This
will help drive consumption which has
been a strong and consistent contributor
to GDP for the last five years.
BRITTANY KLEINPASTE is
director of economic research
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