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Experts count on an oil rebound next year despite crude's rout

Crude oil prices will be dramatically higher one year from now, unless virtually every prediction is wrong.

According to an informal BNN analyst poll, experts almost universally expect 2016 to be oil’s rebound year. However, the sub-US$40 state of oil prices heading into the final days of 2015 and supply continuing to outpace demand over the next several months suggest a significant uptick in the not-too-distant future is far from a sure bet.

“Our current period-average forecasts for the end of 2016 are not completely out of reach,” Harry Tchilinguirian, head of commodity strategy for BNP Paribas, told BNN. He expects WTI to average US$50 per barrel throughout 2016; that means for every day next year oil is closer to US$40, it will need to spend the same number of days closer to US$60 in order to achieve a US$50 average for the entire year.

Francisco Blanch, who runs the commodities and derivatives research team for Bank of America Merrill Lynch, expects WTI to average US$48 next year. However, that expectation is from Blanch’s most recent report, dated November 23rd, and he declined through a spokesperson to provide a specific year-end estimate.

Based on current prices, the forecasts from BNP and BofAML expect a rebound in WTI prices of more than 60 percent over the next 12 months. And they are far from the only sources of oil optimism.

Mike Tims, who led the investment banking division of Calgary-based Peters & Co Ltd. for decades before retiring as chairman in 2013, has a nearly identical expectation. He says WTI will make it all the way to US$58.60 per barrel by the end of next year.

“I know that looks optimistic now, but the supply/demand balance should be better by the end of next year and there are pockets of geopolitical risk out there also,” Tims told BNN.

TD Securities recently released an expectation for WTI to remain “below US$45 per barrel” for the entire first half of 2016 before eventually beginning to climb. Patricia Mohr, vice-president and commodity market specialist for Bank of Nova Scotia, told BNN she also expects “considerable weakness” in oil prices through the first half of the year, but “prices will recover to the US$50-$55 per barrel mark by late 2016.”

The reason why oil prices remain under so much pressure is very simple: oversupply. The Organization of Petroleum Exporting Countries accounts for roughly 40 percent of the world’s crude oil production and has previously acted as a cartel; hiking or halting its collective output to keep prices relatively stable.

OPEC effectively gave up its cartel title after its last meeting by refusing to slow production even though global crude production is roughly two million barrels per day above current demand. The goal of OPEC’s initial decision to overproduce was to drive out new sources of supply – specifically from the United States shale, but also growing oil sands output from Canada – but it has proven a difficult goal to achieve. That goal could be even further out of reach in 2016, with Iran expected to add roughly one million barrels per day worth of production as western powers ease sanctions; adding even more to the global crude glut.

Canada’s oil and gas sector has cancelled tens of billions dollars’ worth of planned investments, cut tens of thousands of jobs and the industry’s largest players are dramatically reducing their spending plans for next year. And yet, production is continuing to increase. Calgary-based oil sands giant Cenovus Energy is perhaps the best example of this trend, having announced in early December plans to cut its 2016 budget by 19 percent while sticking to plans of growing production by 12 percent.

Saudi Arabia, by far the largest and most influential OPEC member, could singlehandedly send prices higher by unilaterally deciding to cut its own production. However, BofAML’s Blanch noted in his most recent report that the Kingdom could have an even more negative effect on crude oil prices without adjusting its output at all.

“If Saudi Arabia cannot resist forces created by a strong U.S. dollar and de-pegs the riyal to follow Russia and Brazil, oil prices could collapse to US$25/barrel,” he wrote. Blanch noted such a move was “highly unlikely, but [potentially] hugely impactful” since it could leave prices mired at the sub-US$30 level for a matter of weeks or even months.

Jack Ablin, chief investment officer at BMO Private Bank, said in a December 15th commentary that the possibility of riyal devaluation “represents one of the biggest near-term threats to global crude prices.”

“A weaker riyal would enable the Saudis to maintain their current production while addressing their budget shortfall,” Ablin wrote. “It’s a macro risk worth watching.”

Despite all the risks of a genuine price rebound still being years away, there is big money betting on a rebound. Pacific Investment Management Co., which oversees nearly US$1.5-trillion in assets, recently said it was buying some energy-related stocks on an expectation of oil prices rebounding to the US$60 level by the end of 2016.

“We are becoming constructive in this sector because we expect oil higher in price over the next 12 months or so,” Dan Ivascyn, PIMCO’s chief investment officer, said on December 8th.

Near-consensus expectations for an oil price rebound is clearly there, even if the evidence to support those expectations, is not.

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