Crude Oil Price Forecast 2015 and 2016
Commodities / Crude Oil Sep 01, 2015 - 06:03 AM GMTBy: Nadeem_Walayat
The crude oil price has relentlessly trended lower all year to an unimaginably low price low of $37 of just a few days ago, falling from $100 a year ago. The severe bear market has not only caught many market commentators off guard but has had a devastating impact on several major economies that are heavily reliant on high oil prices such as Russia, the gulf states, and other emerging markets reliant on their energy sector tax revenues to finance state spending and of course Britain's very own Scotland that a year ago was toying with idea of committing social and economic suicide (independence referendum).
The following video aptly illustrates what would have happened not only in Scotland but in the whole of the UK during the past 12 months if the SNP separatist fanatics had succeeded in convincing the Scottish electorate into voting for Scottish independence that would have unleashed forces that literally would have torn the UK apart, something that the SNP fanatics continue to remain ignorant to today, this despite the fact that the oil price collapse of 2015 alone would have collapsed the Scottish economy fuelling the process for the disintegration of first Scotland and then the rest of the UK.
UK During the Year After Scotland Votes YES to Independence:
by SaveTheChildren (youtube)
A year ago the SNP fanatics were busy galvanising the gullible masses with a stream of heart tugging propaganda into convincing the Scots to effectively vote to commit suicide by leaving the UK which I liberally warned of the consequences in dozens of articles and several videos at the time of the catastrophe that lay in store for Scotland which would be the polar opposite of the SNP's propaganda, the reality of which would literally include the breakup of first an Independant Scotland and the remaining UK as excerpted below:
Sep 07, 2014 - Scottish Independence YES Vote Panic - Scotland Committing Suicide and Terminating the UK?
Opening Pandora's Box of Disintegration, the Balkanisation of Britain
The peoples of the United Kingdom are literally being sleep walked towards the edge of the cliff, most completely unaware of the potentially disastrous ramifications for not just Scotland but for what lies in store for the remainder of the United Kingdom following a Scottish Independence YES vote that would break start the process for ripping apart a 300 hundred year old entity of an United Island of Great Britain, which as I have repeatedly warned of during 2014 that a YES vote would literally sow the seeds for the balkanisation of Britain as this Island would literally tear it itself apart as the status quo of what had been taken for granted would no longer exist.
A whole host of news during the past year illustrate that the approaching Scottish Independence vote has already galvanised agitants right across the UK, for instance blowing on the embers for Cornish independence as they wave their aptly coloured Cornish black funeralesk flag that continues with calls of autonomy literally right at the other end of Britain from the Northern and Western Isles with calls for their own devolution from Edinburgh and even calls for their own parliament that sows the seeds not only for the balkanisation of Britain but also for breakup of an newly Independent Scotland that following a YES vote would soon start to disintegrate, as for instance the bordering regions would reassert their separate identity that has far more in common with the North England than much of Scotland, formerly known as the Kingdom of Northumbria that stretches from Edinburgh in the north all the way to the city of Sheffield in the south.
Whilst Alex Salmond, Scotland's Nigel Farage repeatedly plays the Scotland is rich because of North Sea oil card, what he convientely omits is that a significant portion of Scotland's oil reserves lie in the waters of the Northern Isles (Orkney and Shetland). Many people of the Northern Isles see themselves as having far more in common with Norway than Scotland which given the near immediate currency, financial and economic crisis that would follow independence would be fast pulled towards sharing sovereignty for far greater stability with the likes of Norway that could achieve what it could never have done militarily, namely expanding its borders and gaining many western north sea oil fields. Though in all probability the Northern Isles would probably eventually settle as becoming a protectorate of the United Kingdom along the lines of the Isle of Man.
So if Alex Salmond 'King of the Scots' does succeed in his tunnel vision mission for an Independant Scotland then he will likely go down in history as the first and last Prime Minister of Scotland as we know it today, which effectively means a Yes vote on 18th September will be Scotland voting to commit suicide as when the dust settles what remains would be a mere fraction of its current size.
Oil Price Crash and SNP Independent Scotland
Nothing illustrates the magnitude of the potential catastrophe that was the SNP's economic programme for an Independent Scotland (I.S.) than its reliance on an oil price well NORTH of $120 so as to turn Scotland into the promised land of milk and honey, the picture being painted was of an Independant Scotland (I.S.) of a paradise on earth, not that far removed from reality then that which the Syrian I.S. paints for the worlds gullible muslims that crave a fast track to paradise.
With every dip in the oil price SNP propaganda responded with the price drop being just temporary instead as we have seen a year on the economic collapse of an Independent Scotland would have been spectacular even worse then that of Bankrupt Greece. The SNP's Economic Baldrick-esk Master Plan for an Independent Scotland that was wholly based on reaping huge rewards from North Sea oil export tax revenues where SNP propaganda had convinced many Scots to Vote to effectively commit economic and social suicide by voting in last Septembers referendum that came close to achieving the catastrophe on the basis of propaganda implying upwards of £9 billion in North Sea oil tax revenues that would be raised to finance Scotland's budgetary black hole, which in the fever pitch of the campaign had reached the heights of £11 billion so as to exaggerate the degree to which Scotland could prosper and fill the void left by the withdrawal of the English subsidy that currently amounts to £9 billion per year.
Even the Governor of the Bank of England stepped in at the start of this year by warning "the Scottish economy was heading for a “negative shock”.
The problem with SNP economic propaganda is that it was based on a oil price being well NORTH of $100 per barrel, however a sub $50 oil price does not just mean that an Independent Scotland would have made half the forecast tax revenues i.e. £3.5 to £5 billion, instead the reality is that an Independant Scotland today would be forced to bear COSTS in support of a collapsing oil industry, just as the UK government has stepped in to support the Scottish oil industry to the tune of £1.5 billion. So an Independant Scotland would today have a negative cash flow from North Sea oil of about -£1.5 billion a year and it is this that illustrates the magnitude of the catastrophe that Scotland only just missed by a whisker if they had fallen for SNP nationalist propaganda.
Czar Putin and the Oil Price
Meanwhile the oil price collapse of 2015 has forced Czar Putin to reign his Ukraine and eastern europe military ambitions which all year have remained stuck in an holding pattern in Ukraine after last years land grab that few saw coming but which I warned of at the very start of what lay in store for the people of Ukraine.
24 Feb 2014 - Scottish Independence Economic Consequences for England, UK, Ukraine 2014, Britain 2016?
Just as an Independent Scotland, Russia requires an oil price north of about $110 to maintain its state finances and for every $1 below $110 Russia loses an estimated $2billion in revenue. With crude oil currently trading below $50 that's a a huge revenue loss of well over $120 billion per annum that has plunged the Russian economy into Recession with the economy looking set to contract by as much as 4% that is also bearing the sanctions consequences of the Ukraine war that is costing Russia at least 1% of GDP.
Whilst the ivory tower academics that permanently beat the drum of deflation, especially in the wake of the oil price collapse would be well served to take a look at what has happened to Russia where the inflation rate has soared to over 15% as a consequence of the loss of petro dollars that has seen the Russian Ruble grind lower to a 50% of loss of value against the dollar on a year ago.
So its no wonder that Czar Putin has pressed the pause button on the Ukraine war to probably wait until the oil price has recovered to $100, towards which Russia has little control over bringing about.
In fact the budgets of virtually every major oil producer require an oil price north of $60 just to break-even. With several such as Russia requiring a $100+ break even oil price and what is in large part sparking the economic migration of tens of thousands a month out of African oil producers such as Nigeria whose government requires an oil price of $120 to break even.
Oil Price Economic Stimulus
Whilst the producers / exporters are hurting the oil consumers / importers are experiencing a oil price bonanza as the price drop amounts to an effective transfer of wealth from oil producers to oil consumers to the tune of at least $1 TRILLION per year, a huge economic stimulus for the likes of the US, UK, Europe and every other major oil importer that has probably saved the Euro-zone economy from re-entering recession this year.
Oil Demand / Supply Fundamentals
China
However where China is concerned, its the other way around for the economic slowdown in China that has recently been felt in the global stock markets is actually a significant driver FOR the collapse in oil price. So whilst lower oil prices are supporting the Chinese economy, other drivers such as over capacity far surpass its stimulus that is likely to persist for the remainder of 2015 and into early 2016. So China does not look set to spark a fundamental turn around in crude oil demand this year at least.
Iran
The recent thawing in Iran / West relations implies the potential for an huge increase in the supply of oil out of Iran which has the worlds fourth largest oil reserves and second largest gas reserves. Whilst it may take as long as year for Iran to ramp up production of another 500k barrels a day. However a more immediate supply boost could come from the release of as much as 50 million barrels of oil in storage.
Saudi Arabia
Whilst there is no sign that the Saudi's are about to cut oil production in support of the oil price so that they are better able to finance their own large budget deficit which is estimated at $80 billion a year! However, against this the Saudi' have a $700 billion sovereign wealth fund to draw upon. In fact in strategic terms the Saudi's may well have played a part in engineering the drop in oil prices in response to market share being lost to the US shale oil industry and other non OPEC producers such as Russia so as to slowly but surely put many competing producers out of business who need a price of $60 just to break even such as Scotland's oil industry and many players in the U.S. shale oil industry who today are suffering and cutting back on production / exploration with many expected to go bust, especially those who have borrowed heavily when oil prices were high, but now are unable to service their debt mountains.
The U.S. shale oil production peaked this year at approx 5.7 million barrels per day and today has declined to 5.35 million barrels a day and is expected to continue to decline in response to a sustained low oil price. Therefore all the market commentators betting on Saudi Arabia to act to raise the oil price are going to be proven wrong, as Saudi Arabia is clearly playing the long game in very effectively dealing with competing producers.
So on the basis of fundamentals there is little sign for an end to low prices any time soon. Which means any bottom in the crude oil price is unlikely to spark a return to the likes of $100. More probably to stay stuck in a much lower range that this article will seek to determine the price levels of.
Crude Oil Price Forecast 2015
My oil price forecast for 2015 as a component of analysis of the US Dollar of 14th December 2014 expected the oil price to trend lower into Mid 2015, targeting a drop from the then approx $60 to a target low price of $36:
14 Dec 2014 - U.S. Dollar Collapse? USD Index Trend Forecast 2015
USD / Crude Oil Inverse Relationship Chart
Whilst it is beyond the scope of this analysis to conduct a forecast for crude oil prices, nevertheless crude oil is clearly in a STRONG downtrend / bear market with no sign of an end to this that ultimately targets previous multi-year lows along $36. Which implies that the over-riding trend should be towards lower oil prices before the crude oil price bottoms out. This therefore continues to suggest US Dollar strength for some time until such a basing pattern starts to materialise which conveniently coincides with my building view for the US Dollar strength into a mid 2015 peak.
The crude oil price subsequently did trend slower toward its mid year target of $36, by actually putting in a bottom a few days ago at $37.75 (WTIC). Which now implies that the oil price has bottomed. Therefore this analysis will seek to determine what comes next for the oil price for the remainder of 2015 and into at least mid 2016.
TECHNICAL ANALYSIS
TREND ANALYSIS - The last close of $48 represents a $10 rally on the last low of $37.75, whilst in percentage terms this is a huge 25% on the low. However in terms of trend has not changed much for the price chart clearly illustrates that the crude oil price is stuck within a trading range of between $60 and $40 with the most recent close of $48 virtually smack bang in the middle of this range and as the previous multi-year range suggest that the crude oil price could spend several YEARS stuck in this range.
SUPPORT AND RESISTANCE - Bear market bottom low lies in the zone $37 to $42. Whilst trading range resistance lies in the zone $60 to $64.
ELLIOTT WAVE ANALYSIS - The sept 2014 high of $112 was clearly a fifth wave peak that has subsequently ushered in a 5 wave decline to $37 which now implies an ABC correction higher towards $60 to $65. Though because we are in a trading range then this corrective rally is not going to be so simple as an ABC but resemble the messy pattern along the highs from 2011 to 2013 i.e. an ABC+ABC best describes what will probably pan out. Nevertheless EWT does suggest that the low is in, and that the immediate trend is higher towards $65. Which will probably be followed by another downtrend towards $42.
MACD - The MACD indicator is showing significant positive divergence to the oil price which is supportive of expectations for a trend higher. Overall the MACD is supportive of calmer price action ahead, namely a trading range.
SEASONAL ANALYSIS - The seasonal pattern is for the crude oil price to trend higher into October and down into early December. This supports expectations for the current rally to continue for another month or so to target $64 before reversing lower towards $40 and maybe a test of the $37.75 low before the end of this year.
US DOLLAR / OIL - It is often taken as granted that commodities tend to have an inverse relationship to the US Dollar by virtue of the fact that internationally commodities are priced in dollars i.e. a strong dollar cuts the price of a commodities in foreign currencies therefore this should, most of the time be reflected in the price charts of major commodities such as crude oil. In additional to dollar pricing, the crude oil price has literally collapsed that in times of economic uncertainty (falling oil demand) prompts both flight to safety, namely the worlds reserve currency and acts as a stimulus for the US Economy and thus the US Dollar as a consequence of falling energy costs.
The crude oil price has continued to exhibit a strong inverse relationship to the US Dollar apart from the most recent price action which shows crude oil price strength. My long standing forecast for the US Dollar is to marginally weaken into the end of this year from the current level of 96 towards 93.
14 Dec 2014 - U.S. Dollar Collapse? USD Index Trend Forecast 2015
A marginally weaker US Dollar should therefore be supportive of the crude oil price therefore implying a trend towards the upper end of its price range of around $64 as well as now probably holding the bottom of the trading range at $40 on any corrections.
Crude Oil Price Forecast 2015, 2016
Whilst it is highly probable that my original forecast low of $36 has now been achieved at $37.75. The over riding message from this analysis is that the crude oil price looks set to enter into a prolonged trading range of approx $64 to $40 for the next 12 months. Therefore my forecast conclusion is for crude oil to trend higher in the immediate future to the upper end of this trading range before turning lower and to remain within this trading range for another year. The range could also exhibit very short-term spikes to outside of this range i.e. to $70 and as low as $30, though I would expect downward price spikes to be far more probable than upward spikes above $64.
Oil Stocks
In terms of investing, with a sustained low oil price oscillating within a trading range for at least another year then this suggests that the oil sector is going to continue to contract with many players going bust due to unserviceable debt mountains built up during the boom years. Therefore it is going to be difficult to find the few golden nuggets that buck the trend amongst all of the junk so it is probably better to wait a year or so for the dust to settle then take a gamble today. However, if one does want to invest then accumulating positions at the bottom of the trading range is probably the best strategy.
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By Nadeem Walayat
Copyright © 2005-2015 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.
Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.
Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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