What’s bad news for oil and gas companies is welcome news for the average citizen. In 2016, you can expect to see global gas prices remain low, even though consumption is expected to increase in countries like the United States, Russia, China, and India. What does this mean for the global economy and your wallet? That remains to be seen.
Moody’s Lowers Price Assumptions for 2016
In mid-December, Moody’s Investors Service significantly lowered its price assumptions for crude oil in 2016, amidst continued high levels of production by global oil producers. The low price assumptions indicate that supply growth will continue to outpace the growth in consumption throughout much of 2016.
Specifically, Moody’s lowered prices assumptions for Brent crude oil, which is seen as the international benchmark, from $53 to $43 per barrel. Price assumptions for West Texas Intermediate crude, the North American benchmark, were lowered from $48 to $40 per barrel.
The silver lining for those within the oil and gas industry is that Moody’s expects both Brent and West Texas Intermediate prices to increase by $5 per barrel in both 2017 and 2018.
Consumption Remains High – Just Not High Enough
When you look at U.S. consumption numbers, it’s hard to imagine that the demand for gas isn’t keeping up with supply. After all, roughly 1 million gallons of gas are consumed at the American pumps every 15 minutes. The problem isn’t what’s happening at the pump, though. Americans are still driving and purchasing gas. The problem is that oil and gas companies are producing far too much supply for their own good.
The Organization of the Petroleum Exporting Countries (Opec) refuses to follow the lead of some other smaller organizations, and momentarily curb production. This could become a major problem in the coming months.
“OPEC oil producers continue to produce without restraint as they compete for market share, exacerbating the currently saturated markets,” says Terry Marshall, senior vice-president at Moody’s. “Russia has also greatly increased production, and the possibility that sanctions will be lifted on Iran in 2016 could flood the market with even more supply.”
“Increasing consumption will not match the increase in supply,” Marshall is warning anyone who will listen. “It will take time for these large global inventories to unwind, and combined with the possibility of new supply coming online from Iran, we expect oil prices to remain lower for a longer period than previously anticipated.”
The Beneficiaries of Low Oil Prices
While those within the oil and gas industry are scrambling, others are obviously benefiting from sustained low prices. Aside from consumers at gas pumps, airlines, sea transporters, and rail companies all stand to gain from low crude oil prices.
However, should crude oil prices once again skyrocket to the rates we saw in 2008, it will be the oil executives and hedge funds specializing in oil debts that would enjoy immense benefits.
Eyes to the Future
When it comes to any market, assumptions are nothing more than educated guesses. While Moody’s and other organizations are suggesting a prolonged devaluation of crude oil prices at the hands of an oversupply, the reality is that anything can happen. It doesn’t take an expert to study historical charts and see that crude oil has been relatively volatile over the past decade.
As we move through 2016, it will be interesting to see if sustained low prices force Opec to lower production numbers, or if they’ll choose to continue driving up their supply in an effort to oust smaller industry players. Regardless of what happens, 2016 is shaping up to be a favorable year for consumers at the pump.