Amid the absence of stability in the global economy and a Chinese market crash, oil prices keep on going down and setting new major lows. Today, Brent oil is trading at $32,82/b after seeing another bearish momentum. WTI oil us trading at $32,56/b. It should be noted that these price levels are among the lowest ones in 11 years.
At the same time, more and more experts say that this is not the end of the bear run. The bias is clearly bearish at this point. The thing is that China, which is the world’s biggest importer and consumer of crude oil, has been seeing energy prices drop over the last 46 weeks. This is the record long period of declining energy prices. The investment community has been pessimistic on crude oil and the latest poor economic figures from China aggravated the situation and added to he overall pessimism. This led to the situation when investors are afraid of investing in China, which means the Chinese economy is suffering from the flight of capital and shortage of investments while being reoriented from external trade to domestic consumption.
Some of those optimistic experts are constantly trying to find something positive in the current environment but everything eventually gets crushed by the unfavorable economic situation in China. On top of that, oil experts usually don’t make long-term predictions during the first couple of weeks of the new year. However, if to make a long-term prediction now, we must confess that the prospects are gloomy as the global economy is likely to continue slowing down throughout the rest of 2016. There are more and more reasons to believe that this year may well bring a lot of uncertainty and volatility in financial markets, including the market of crude oil.
At this point, even the most optimistic experts say that if there is a bull run in the market of crude oil, this one is going to be a minor one and is probably not going to happen until late 2016 – early 2017. The optimists say that due to very low oil prices, we may see a considerable production cut worldwide since few companies are actually capable to survive a long period of such unfavorable prices making the business a loser. That is why the excessive supply may be slightly reduced to favor a minor recovery.
2016 Oil Prospects
Once again, most experts certainly don’t feel optimistic when it comes to crude oil. There are too many deterrents preventing the market from developing. In particular, the U.S. Dollar is getting stronger after the Fed’s interest rate hike (which is probably not the last one this year). The U.S. Dollar has a negative correlation with most commodities, including crude oil. The American currency is expected to gain at least 5% more this year. This leads some experts to believe that oil prices may go further down to $20/b. A 5% increase in the value of the American currency traditionally triggers a 10-25% drop in commodities. Given the current price of $35-$32/b, most of the oil production is unprofitable, not to mention $20/b, which makes oil companies go deep into losses.
These days, more and more oil companies are forced to dismiss thousands of employees and cut production while saving on everything possible. Some promising oil projects are suspended till better times. Investors are fleeing the industry until it is too late. Under such circumstances savvy investors are definitely not going to invest billion in crude oil. Oil giants seem to be the only ones still fighting for life. However, sooner or later they will also start giving up if the tendency continues. The first wake up call is usually the time when major oil companies start paying less as dividends to their investors.
Even if oil drops down to $20-$25/b, U.S. shale oil companies are said to be able to survive it even though seeing losses. They say it costs an average American shale oil company some $40 to produce a barrel of crude oil. Even though they are suffering losses, they are not going to shut down their businesses while hoping to survive the prices of low prices and stay in business to profit later.
