Oil Forecast: 5 Things We Know Going Into 2016
The oil bust isn't going to get better fast in 2016.
Photo courtesy of Texas State Library & Archives Commission
A little over a year ago Gallery Furniture owner Jim McIngvale made a savvy bet with customers: Anyone who bought $7,000 worth of furniture would get his money back if oil hit $85 per barrel again before the end of 2015.
Well, Mattress Mack won't be doing any refunds. As we come to the close of the year, oil prices have only gotten lower since he made his bet and it looks like things won't be turning around any time soon for the oil industry, which has been grappling with low prices and subsequent layoffs, bankruptcies and mergers since it became clear at the end of of 2014 that oil prices were probably going to stay limbo-level low.
Here are a few things to keep in mind as we roll into 2016:
5. Oil prices aren't likely to get much better any time soon. This whole thing started after oil prices had reached record highs of more than $100 per barrel in June 2014. At the time analysts were talking about how oil prices would never really fall again and how the boom, fueled by oil gushing out of various shale plays, including the Eagle Ford Shale in South Texas, the Permian Basin shale plays in West Texas and the Baaken in North Dakota, would never end. And then prices started tumbling that same month and they've continued to fall for most of this year. (As we've written before, the reasons behind oil's decline are complicated and tied to all kinds of things, including the oil pouring out of U.S. shale plays, OPEC increasing production and a whole slew of global factors.)
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In December the industry reached a new low with oil prices again plunging to a multi-year low of about $35 per barrel. We haven't seen prices this low since the 1990s and it looks like the prices won't be climbing back up anytime soon. On Tuesday Dennis Gartman, an investor known for his market predictions, told NBC that he doesn't think oil will actually manage to go below $35 per barrel, but he said that these prices are probably the "new normal" for the oil industry. Going into 2016, it's best not to look for those good-ole-days prices of $90 per barrel and up, because oil is most likely going to stay around $37 per barrel, according to Gartman.
Of course, there was a point earlier this year when analysts thought oil wouldn't go below $50 per barrel, so, that's worth keeping in mind.
4. The end of the oil export ban isn't going to magically turn things around. After 40 years Congress lifted the U.S. ban on oil exports in an agreement that was bundled into the budget deal. Lots of people in the oil industry have been pushing Congress to do this for years, with producers lobbying even harder once the shale play oil boom got going because they were certain they could get a better price for shale oil on the global market. And now the ban is lifted so all of the oil industry's problems should be solved right?
Unfortunately it really doesn't work like that. For one thing, because of the downturn oil prices in the United States and overseas are about the same and the entire oil market is flooded with crude that is dragging the price down. On top of that, as of right now the United States is still guzzling about 19 million barrels of oil per day right here, so any exporting we do will just be a glorified swap, as we noted last week.
So yeah, the end of the export ban is nice and all, but it doesn't actually change the situation.
3. Halliburton and Baker Hughes still haven't managed to merge, but there have been other oil company mergers. Once it became clear that oil prices weren't going to bounce back anytime soon, the strong companies started gobbling up the weak in true law-of-the-jungle form. Mergers have continued within the industry as the year has unfolded while the independent exploration outfits, struggling to keep afloat in the downturn, have become vulnerable to takeovers, according to Forbes.
But there's one merger that still hasn't gone through. When it was first announced in November 2014, the deal to combine Halliburton and Baker Hughes, the second and third largest oil field was huge. Before the bust, drilling in the Eagle Ford Shale in South Texas, the Wolfberry Shale in West Texas and the Baaken Shale in North Dakota was so brisk that Halliburton and Baker Hughes were able to compete with each other without having to resort to lowering their prices to pull in customers. Two of the largest competitors in the oil field services industry were going toe to toe in an environment where they didn't have to compete on price, but then everything slowed down. However, once the bust rolled around there wasn't enough work to support both companies and in a lot of ways the $34.6 billion merger made perfect sense.
The problem is that the U.S. Justice Department officials reviewing the merger seem to think that combining these two companies makes a little too much sense and might be the sort of deal that would give the company way too much control of the market. Thus, regulators have yet to sign off on the deal and it's unclear if Halliburton and Baker Hughes officials will ever be able to reconfigure the two companies to make the deal palatable to the feds. Earlier this month company officials announced another extension: Now they have until April to get the deal done. It'll be interesting to see if they actually pull it off and it will be messy for both companies if they don't.
2. There have been more than 200,000 layoffs and there will be more in 2016. The industry has idled more than 1,000 rigs and slashed more than $100 billion in spending this year to cope with the bust, according to Bloomberg, and more than 250,000 energy workers from around the world have lost their jobs since the start of the downturn. There have been thousands of layoffs in Houston and about 56,000 layoffs in Texas so far, according to KUHF.
While this doesn't approach the catastrophic numbers of the 1980s oil bust — back then more than 240,000 energy industry jobs were lost in Texas alone — it's still a ton of people out of work. With predictions out that oil isn't expected to make a sudden $100-per-barrel comeback in 2016, Royal Dutch Shell has already announced the company is cutting 2,800 jobs in 2016, and Shell probably won't be the only company cutting jobs.
1. Keep in mind, it could always be worse (and it might have to get worse before it gets better.) All of this — the low prices, the layoffs, the mergers — sounds pretty dire, but there are a few upsides. For one thing, gas prices have finally dropped — we've even seen gas selling for less than $2 per gallon — which is actually helpful for people who, you know, have to regularly buy gas.
However, investment bank Goldman Sachs warned earlier this month that it's going to take prices dropping even lower — as in $20 per barrel — to get the big oil companies to cut their spending and pull enough drilling rigs out of action to get daily U.S. production to fall enough to cut into the global supply glut that is suppressing prices. Now there's no telling if prices will ever actually get that low in 2016, but there's no guarantee that it won't.
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