Highlights

  • Markets were routed in December as persistent oversupply, bloated inventories and a slew of negative economic news pressured prices so that by mid-January crude oil touched twelve-year lows. At the time of writing, both ICE Brent and NYMEX WTI had sunk below $30/bbl. ICE Brent was last trading at $28.86/bbl with NYMEX WTI forty cents higher at $29.26/bbl.
  • Exceptionally mild temperatures in the early part of the winter in Japan, Europe and the US, alongside weak economic sentiment in China, Brazil, Russia and other commodity-dependent economies, saw global oil demand growth flip from a near five-year high in 3Q15 (2.1 mb/d) to a one-year low in 4Q15 (1.0 mb/d). The outlook for 2016 has demand growth moderating to 1.2 mb/d.
  • Global oil supplies expanded by 2.6 mb/d in 2015, following hefty gains of 2.4 mb/d in 2014. By December, however, growth had eased to 0.6 mb/d, with lower non-OPEC production pegged below year-earlier levels for the first time since September 2012.
  • OPEC crude output eased by 90 kb/d in December to a still-lofty 32.28 mb/d, including newly-rejoined Indonesia. Iran, now relieved of sanctions, insists it will boost output by an immediate 500 kb/d. Our assessment is that around 300 kb/d of additional crude could be flowing to world markets by the end of 1Q16.
  • Global inventories rose by a notional 1 billion barrels in 2014-15 with the fundamentals suggesting a further build of 285 mb over the course of 2016. Despite significant capacity expansions over 2016, this stock build will put storage infrastructure under pressure and could see floating storage become profitable.
  • Global refinery runs averaged 79.5 mb/d in 4Q15, down 0.3 mb/d on last month's estimate due to lower-than-expected throughputs in Other Asia and a very high maintenance schedule in October. Global refinery margins weakened in December as middle distillate cracks fell and overwhelmed the resilience of gasoline and naphtha.

Can it go any lower?

Iran's return to the oil market confirms what has been inevitable for six months since the P5+1 deal was signed in Vienna last July. Now the suspense is over, attention switches to the impact on oil market balances and the likelihood of further declines in oil prices following a torrid start to 2016. In the first two weeks of the year, both WTI and Brent settled below $30/bbl and a procession of investment banks has  warned that oil prices "could" fall to $25/bbl, $20/bbl or, in one case, $10/bbl. From the world of Big Oil, BP eliminated another 4,000 jobs and Petrobras slashed its five-year investment programme by 25%, clear signs - and there are many other examples - of expectations for a long period of lower prices.

Some analysts argue that the easing of sanctions on Iran is already "priced in" to the market. There are considerable uncertainties around the quality and quantity of oil that Iran can offer to the market in the short term and the not inconsiderable challenge of finding buyers willing to take more oil into an already glutted market. However, if Iran can move quickly to offer its oil under attractive terms, there may be more "pricing in" to come. Time will tell. (See 'Iran is back'.)

In publishing our first OMR of 2016 we conclude that the oil market faces the prospect of a third successive year when supply will exceed demand by 1.0 mb/d and there will be enormous strain on the ability of the oil system to absorb it efficiently (see 'Global oil storage capacity to surge in 2016 and beyond'). On what we must struggle to call the bullish side, non-OPEC oil production is projected to fall by 600 kb/d; but this will inevitably be largely offset by higher production from Iran. Nor can we expect other Middle East producers to stay on the sidelines; their regularly stated policy is to protect market share and allow the price to find its level. Saudi Arabia's sharp increase in domestic fuel prices is a sign that OPEC's top producer is preparing for a long period of lower prices.

Although 2015 saw one of the highest volume increases in global oil demand this century, we have long believed that this could not be repeated in 2016. But, with crude oil prices plunging below $30/bbl, must we expect some boost to the rate of growth in 2016? Unfortunately, the New Year has been awash with pessimism about economic growth. This was starkly illustrated when the World Bank said on 6 January that growth in developing countries in 2015 was the slowest since 2001 and today's varied travails in Brazil, China, and Russia mean that 2016 will see little, if any, improvement. The strength of the dollar will inevitably impact on local currency costs for oil importers and thus exert pressure on oil demand growth. For China, for so long the engine of global demand growth, we expect demand to increase by 350 kb/d, below the recent trend level.

Although we do not formally forecast OPEC oil production, in a scenario whereby Iran adds 600 kb/d to the market by mid-year and other members maintain current output, global oil supply could exceed demand by 1.5 mb/d in the first half of 2016.  While the pace of stock building eases in the second half of the year as supply from non-OPEC producers falls, unless something changes, the oil market could drown in over-supply. So the answer to our question is an emphatic yes. It could go lower.