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Page added on January 12, 2016
Robert Rapier: My 2016 Energy Predictions
When I made my annual energy predictions a year ago, I noted that I foresaw a “lot of uncertainty in the energy markets” and indicated that “the direction on several fronts is unclear.” That certainly proved to be the case as numerous pundits – including me – missed on oil price predictions.
Unfortunately, the market uncertainty is carrying over into 2016. This has implications for several predictions so, as I cautioned last year, it will be a challenge to repeat 2014′s record. But as always, the context is more important than the prediction itself, because context allows one to adjust one’s own views as events play out during the year. I may predict an oil price, but I also try to provide context as to what could go wrong with a prediction, so that readers can adjust their own expectations as the year unfolds.
As a reminder, I strive to make predictions that are specific, measurable, and preferably actionable. If forecasts are broad and vague, one can almost always declare victory.
For instance, I recently saw a prediction that wind and solar power will grow robustly in 2016. A prediction without defined measurables has limited utility in my view. At the end of the year, “robustly” gives the prognosticator an awful lot of leeway to declare victory. What if solar grows rapidly through May and declines the rest of the year? The prognosticator can still declare the prediction to be true. He could declare victory in just about any case except a protracted and extended decline in solar power capacity — something that is extremely unlikely. I might as well predict that the average price for oil will be between $20/bbl and $150/bbl.
So I try to make sure that mine are specific enough that at the end of the year, there is no room for interpretation. They are either right or they are wrong. Here are my five predictions for 2016 along with the essential context.
1. U.S. oil production will suffer an annual decline for the first time in eight years.
I have noted in the past that President George W. Bush, largely viewed as a friend of the oil and gas industry, presided over annual declines in U.S. oil production in each of his eight years in office. Ironically, President Obama — whose policies have at times seemed openly hostile to the industry — has seen U.S. oil production rise in each of his seven years in office. It just so happens that President Obama’s terms have coincided with the shale oil boom in the U.S., even though the roots of that boom predate his first administration.
In any case, U.S. oil production has expanded dramatically since Obama took office. But that shale oil boom was driven by high oil prices, and while the collapse in oil prices has consumers smiling as they fill up their tanks, it began to affect U.S. oil production in 2015. Oil production still increased for the year as a whole, but the decline that began just before mid-year is likely to continue into 2016.
Some may view this prediction as a no-brainer. I certainly don’t view it as an aggressive prediction. The main risk to this outlook would be a first-quarter spike in oil prices. There are a number of oil wells that have been drilled but not completed as a result of the depressed oil prices. In the unlikely event that oil prices rise to, say, $60/bbl within the next couple of months, oil producers would rush to bring these unfracked oil wells online, and that could yield production growth from 2015. But don’t bet on that happening.
2. The closing price of the front month West Texas Intermediate (WTI) crude contract will reach $60/bbl in 2016.
As I write this, the most recent closing price of the front month contract for WTI — for February 2016 delivery — was $31.08/bbl. Also as I write this, the highest price on any contract expiring this year is at $39.13/bbl, for December. In fact, you can go all the way out to December 2024 and the highest futures price you can currently find for WTI across this eight-year range is $56.79/bbl.
I am pointing all this out to emphasize that, despite the fact that oil prices were at $100/bbl just 18 months ago, this is a very aggressive prediction. It will require a gain of 93% from the current price in order to be proven right.
This is one of those that I will grade on a curve. If prices fail to crack $50/bbl this year (still 61% above the current price), then I will consider this a complete failure. I would give myself a C if the price reaches $55/bbl, and a B if the price reaches $58/bbl.
I think it’s much more difficult to attempt to pick an average price for WTI this year, because there is so much uncertainty around how long it will be before prices begin to recover. I am betting that happens by the second half of the year, and when prices move up I believe they will move up quickly. But I also believe there will be a lot of resistance as prices approach that $60 level given the number of drilled but uncompleted wells.
3. U.S. natural gas production will suffer an annual decline for the first time in 11 years.
The average price for natural gas in 2015 was $2.62/MMBtu, down $1.75/MMBtu from 2014. It seems likely that natural gas prices will spend this year mostly between $2/MMBtu (approximately the current price) and $3/MMBtu. My intention had been to make a prediction on natural gas prices, but there seem to be few potential catalysts that might push prices either much higher or much lower, making a prediction on the price too much of a coin flip. My guess is higher, simply because prices are unsustainably low.
When the final numbers are tallied, U.S. natural gas production will have set another record in 2015 — the 10th straight annual increase. Natural gas in storage recently topped 4 trillion cubic feet for the first time ever, and these reserve volumes remain above the top of their five-year range. The high inventory levels are helping to depress the price and they are likely going to keep it from rising too high this year. The last time natural gas prices spent significant time in the $2/MMBtu range was 2012, and natural gas production responded by flattening for more than a year. So even though every month in 2015 had higher production than the corresponding month in 2014, I expect the current stretch of low prices to reverse that trend in 2016. I don’t expect a huge decline, but I think this year we will see the impact of lower prices on natural gas production after a decade-long expansion.
4. The Energy Select Sector SPDR ETF (XLE) will rise at least 15% in 2016.
This was my worst miss of 2015, as I called for the ETF to rise 10% for the year. Instead, it fell 24.7% as the slump in oil and gas prices persisted all year. There is no question in my mind that oil prices will rally from where they are. But there is some question as to whether that will happen early enough to lift the fortunes of oil and gas companies in 2016. I think we are likely to see prices remain depressed for another six months, and there is some downside risk for oil prices as crude oil inventories continue to rise.
Nevertheless, fundamentals will ultimately win out, and I think we will see the industry’s prospects start to improve before the end of 2016. I would note that this prediction is starting out in the hole, as the XLE is already down 9% on the year.
5. Hillary Clinton will win the 2016 presidential election.
Eight years ago I told a skeptical relative that I thought Barack Obama would beat Hillary Clinton to the Democratic presidential nomination and go on to win the general election. I do not expect the same sort of upset by Bernie Sanders. I predict Clinton will win the Democratic nomination and the presidency.
The reason this matters is that Democrats and Republicans tend to advocate very different energy policies. Republicans are friendlier to the oil and gas industry, while Democrats generally lean toward renewables. We saw this play out in the spending bill adopted at the end of 2015, when Republicans won an end to the crude oil export ban in exchange for an extension of tax credits for wind and solar power.
I have friends and acquaintances across the political spectrum, and some have sworn to me that Bernie Sanders will win because the country is very angry. I have also heard some insist that Donald Trump will win on the same basis. I don’t think either of these candidates can win the general election, unless they end up running against each other. I just don’t see it happening. Expect President Hillary Clinton to pursue energy policies similar to those pushed by the Obama Administration.
Conclusions
There you have my predictions for 2016. I believe the drop in oil production is the most likely to be proven correct, and the one on the 15% rise in the XLE is the diciest. My overall confidence level for my predictions looks something like this:
Lower oil production >Hillary wins>Lower natural gas production>Oil reaches $60>XLE returns at least 15%.
Consumer Energy Report » R-Squared Energy Blog by Robert Rapier
13 Comments on "Robert Rapier: My 2016 Energy Predictions"
makati1 on Tue, 12th Jan 2016 7:45 pm
My guesses:
1. Probably.
2. Possibly but not likely, barring a war.
3. Possibly.
4. I doubt it.
5. I hope not. It would take a Trump assassination to make it happen at this point in the game.
Billary is Sauron in drag.
Nony on Tue, 12th Jan 2016 9:02 pm
#1 IS a no-brainer. The Bush/Obama stuff is kind of a distracting meander. The comments about how supply might come back on at $60+ ARE interesting. More helpful, would be a prediction of what you think will happen to US production, given “about the strip” happening. Say average price as given by the strip. And then your median expectation for decline (give a plus/minus if you want something to keep score on). Also helpful to compare yourself to EIA projection (are you lower or higher than them). And a little bit about what you think will go down with different factors: LTO, onshore conventional, offshore.
Nony on Tue, 12th Jan 2016 9:06 pm
#2: It’s another bad prediction (other than for saying you were a good/bad guesser) to say that one day out of 250 will close above 60. What matters is the average for the year and the close (as it is heading us into 2017). That’s what matters economically. Also, the prediction confounds trend and volatility. And I have no way of knowing if it’s timid or bold versus what the strip and options predict. I’m sure some super quant could go calculate it. But it’s not tractable by inspection.
Nony on Tue, 12th Jan 2016 9:46 pm
#3 is an interesting one to go into more detail on.
Agreed that current prices are not sustainable and the strip clearly shows that (although even if they go “up” to high 2s, their level is still well well below what shale skeptics and peakers have been predicting over the years). It is stunning to see how much price (including the long term strip) dropped during 2015. And most of that drop in the LT strip was well before the warm NOV-DEC. You predicted a couple years ago that 2017 and 2018 prices would be in the 5s (“higher”) because of expanded demand and not enough low cost supply to meet it. And even someone very cornie like Ralph Eads predicted 5+ needed for shale sustainability a couple years ago. But instead, we see the market anticipating average of sub-4 for the next 10 years. [And in the App, where pipelines are limited, producers are actually cutting back/expanding at somewhere in the 1.5-2 range, as their threshold!]
For production, EIA predicts about flat. You predict less, but no amount. Not that aggressive a call, I guess. Agreed that the inventory needs to be worked off. If you do the math, we have about 1.5 TCF of “over normal” inventory. Working that off means 1.5 BCF/d less production over the course of the year, as it is supplied from inventory adjustment. There’s about 0. BCF/d extra demand from Sabine. But then it becomes a question of if base demand can grow the extra 1 BCF/d. Clearly given prices, we are in an issue of demand limitations more than supply.
Nony on Tue, 12th Jan 2016 9:49 pm
Typos (above):
*extra inventory is 0.5TCF, not 1.5 TCF.
*~0.5 BCF/day Sabine, not ~0.
Nony on Tue, 12th Jan 2016 9:52 pm
4. I don’t know much about SPDRs. Suspect this is a gutsy call as presumably, CAPM would predict about a 7% increase for an equity, long term year over year. Then again, I really have no clue how this SPDR stuff works. If it is a stock index or a futures contract.
Nony on Tue, 12th Jan 2016 10:03 pm
5. Really would have kept this out and made some prediction on energy (midstream, international, coal, renewables, LNG, LTO/cond exports, M&A activities, BKs). I mean you can also predict the Oscars or who will win the NFC South again. [Am I the only one sick of JJ Watt?]
Prediction markets have Hillary at 80% likely to get the D nomination. Bernie at 20%. 50% likelihood she get the presidency. (~40% a Republican wins, 10% that Bernie wins presidency). Not that gutsy a call. Don’t think your sense of the mood of the country is that relevant. Rather get that from RCP and horserace blog (from analytical right) or 538 (from analytical left). They have both quant abilities and political science and election watching skills.
GregT on Tue, 12th Jan 2016 11:10 pm
Nony,
If you so strongly feel the need to argue with Rapier’s predictions, why not sign up for his blog and debate him man to man?
If you have predictions of your own, why not start up your own blog? With credentials like yours, I’m sure that everyone is waiting with baited breath to hear what you have to say.
Nony on Tue, 12th Jan 2016 11:46 pm
Did someone pin a badge on you and make you the big patrol to tell people where to post? This is a comments section and I’m discussing the article.
Do you have any comments on the topic itself, not me? Which predictions do you agree with, disagree with? Why?
Bloomer on Wed, 13th Jan 2016 12:01 am
Crude oil prices is almost impossible to predict, when you have the most volatile region on earth controlling oil output. The hawks have many bets shorting oil, my prediction is there will be a lot of short covering in 2016.
GregT on Wed, 13th Jan 2016 12:18 am
Some of Rapier’s predictions might turn out to be incorrect, and some might turn out to be correct. Only time will tell. Whether I agree with him or not isn’t relevant, they are his predictions, not mine.
Davy on Wed, 13th Jan 2016 6:15 am
NOoo, good job with the predictions. I am glad you are back lately and with sobriety. Gone is your unrealistic cheerleading of the economy and oil complex. I know you are not a doomers. You are always going to be against doom out of a principal of doomers being a nutter group. I greatly appreciate you contributions because you have a great grasp of the oil and economic technicals.
I personally am a doomer and prepper but I appreciate and desire people to come on here and defend the status quo. I want to have as clear a picture of what is coming as possible. Doom is basically an acknowledgment the status quo is dated but how dated is unknown. You help me in my vision on how dated the status quo is.
Davy on Wed, 13th Jan 2016 6:44 am
I see this year differently than all others since 08. This is the year the Fed finally ran out of useful tools and used a remaining tool wrong. The same is true of China. China’s equity markets were its last tool in inflating its economy to maintain the unsustainable growth it had for so many years. The Chinese leadership created a mammoth bubble. This long term Chinese growth was nothing more than a global malinvestment. The Chinese economy was nothing other than an “extend and pretend” “rinse and repeat” economy in a cancer of growth at all cost.
Bad debt and non-preforming loans have been repeatedly messaged and recreated on and on. Collateral has been rehypothecated, reclassified, and regurgitated on and on. Physical development in the real estate sector and industrial sector has created excess supply and industrial over capacity of global proportions. Air, land, and water pollution is massive and global.
We now have a Chinese correction in its equity markets and currency complex. This is influencing emerging markets and resource nations. This is a picture of nothing other than raw demand destruction. We will soon have the US equity market rebalance to a realistic level considering a forced realistic price discovery. We have across the board corporate earnings and global trade drops. The US equity market is the last bright spot to go dark. The rest of the world follows China and the US. The rest of the Brics are a mess and Europe is a skeleton with strings moving it like a puppet.
Oil prices are really somewhat irrelevant in this regards. Prices will bounce around in volatility because that is what oil prices do but this bounce will be in compression. These prices are in a global market of huge proportions with many different players. Some players are huge others are small but numerous. Oil is still a slave to the economy and requirements of business. You have to have a business and economy to lift oil, refine it, and get it to the pump. If the business environment is sick there is little that can be done for price. The oil price range is compressing because of the sickness of limits of growth in the US/China economic dynamics of a cancer of malinvested growth. Bad debt is and bad debt does.
We will likely never again see such dynamics at work. Without these dynamics of US and China driving the emerging markets and resource nations we will never again see global growth i.e. the rate of growth like we have seen since the turn of the millennium. It’s over folks and oil will live in this realm of deflationary volatility of a system that must grow to survive. Without growth broad based entropy takes over with economic abandonment, dysfunction systems, and irrational policies manifest themselves randomly. We have all this along with a broad based halfhearted effort at climate change mitigation with a system that cannot be reformed away from fossil fuels and still grow.
We are in an energy trap. Add to the energy trap a mechanized climate and ecosystem destruction. These are mega self-organizing events set in motion and beyond management. So enjoy the oil “price is right game”. The oil price is irrelevant now. What is relevant is confidence and liquidity of the whole system. This will be the key item of 2016. Will panic shake this global system to its core exposing skeletons of years of moral hazard and poor economic policies?
If the flood of doom does expose the skeletons I predict oil markets and the oil complex will be unrecognizable. I say this because at some point a foundational commodity must be supplied somehow or massive die-off will occur. If the markets can’t do it then martial law will. It is increasingly evident that oil markets don’t work in a long term growth stagnation. This year may not be the year the markets break but it will be the year the reality that the global economy is broken and unrepairable is evident.
There is momentum that will likely see us through the year. The inertia of limits of all efforts is there. The inertia of diminishing returns to a status quo system at limits is there. Yet, we still have an entire global economy motivated and orientated to growth. That is a huge momentum to break. If anyone can break that it is nature. Nature is showing it can. Oil price will live within this paradigm shift in a compressed volatility. Its days of extremes are likely over. Oil is in a hospice of descent with declining real importance because of demand destruction. Peak supply and peak demand are here we just don’t know it yet. Oil markets and its traditional business structures and plans are dated. We are in uncharted waters without options.