Consumer Energy Report is now Energy Trends Insider -- Read More »

By Robert Rapier on Jan 12, 2016 with 8 responses

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%.

Link to Original Article: My 2016 Energy Predictions

Follow Robert Rapier on Twitter, LinkedIn, or Facebook.

  1. By Russ Finley on January 13, 2016 at 12:20 am

    …now that we’re exporting crude oil, yet another argument used to support for corn ethanol (energy independence) just officially went away.

    Natural gas consumption will likely continue to increase as it is being used to replace coal and nuclear at these low prices. With dropping production and increasing consumption, the lines may cross over the next few years, sending the price higher …or not.
    The low oil prices are not helping sell electric cars.

    [link]      
  2. By ADW on January 14, 2016 at 1:12 pm

    Some interesting ideas, look forward to Jan 2017 for the review.

    I would be interested in thoughts on 2015/16 compared to the great price crash in mid-1980′s. I was living in Denver at the time and it was a near total death of drilling, family of mine worked the oil fields in West Texas and it seemed like everyone lost their jobs.

    Back then it was the lifting of the OPEC boycott ban. Today it seems more of a failure of OPEC to control the group. Is it the industry is once again so fractured that OPEC can no longer limit production in a way that props up pricing?

    It was 20 years of low prices following the 80′s

    http://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp

    [link]      
  3. By Benjamin Cole on January 19, 2016 at 2:56 pm

    Nice wrap.

    [link]      
  4. By Optimist on January 26, 2016 at 8:16 pm

    Gotta say, RR, much as I respect your opinions, you have a fighting chance of going 0 for 5 this year. Lower oil production most likely would prevent that from happening, unless you get the $60 price right, which would tend to lift oil production, but would leave you with a different prediction hitting the mark.

    Natural gas supply/demand will depend on how this winter plays out. Could go either way, IMHO.

    A year ago I thought Hillary was a shoo in: now I notice that the more the public sees of her, the more they recoil in horror. The campaign knows it, and is limiting access to her, so that she is running a pretty curious stealth campaign. That might work until there are only two candidates left, then she won’t be able to avoid the limelight. Then again, she might only have to beat Trump or Cruz…

    Predictions #2 and #4 assumes demand for oil will catch up with supply. That will obviously happen eventually. I just don’t see 31 December 2016 as eventually in this case.

    [link]      
    • By galreyno on February 10, 2016 at 11:30 am

      growth demand 1.3 Million barrels a day and the current declining trend in supply will cross in the 2nd half of this year especially if there is any moderate pick up in global economic growth. If OPEC + IRAN and Russia throttle back moderately then I could see $60 in Q4.
      And on the 2016 Election do not count out Rubio yet! As the field narrows he become more appealing to everyday Republicans, Conservative Democrats, Hispanics and young people. A principled young articulate Moderate in this weird cycle could be a winning ticket.

      [link]      
      • By Optimist on February 11, 2016 at 8:06 pm

        OPEC, Iran and Russia cooperating? I think the odds are better that Sanders wins the White House.

        But, yeah, let’s hope Rubio can get off the mat and resuscitate his campaign. For now Trump is riding the wave of anger that a generation of Republican politicians dedicated their careers to. Not such a fun project anymore… Maybe pass another recall of the Health Care law, so everybody can feel better?

        [link]      
        • By galreyno on February 12, 2016 at 8:16 am

          Well OPEC & Russia are colluding behind the scenes now. And if Iran keeps it up the next non DEM Prez will reimpose sanctions. They are rubbing the lifting in Kerry and Obama’s faces.

          [link]      
  5. By Forrest on February 11, 2016 at 9:06 am

    I did read Pickens sold his positions waiting for market trend change in future. Also, read Toyota was powering their hydrogen car production assembly plant with hydrogen for some of the base loads such as AC and fork lifts. I would assume via fuel cell. They mentioned wind and solar production of the hydrogen. They plan to fuel up the production cars with this generation, as well.

    I can only say that I’ve lived through the extraordinary change over of propane fork lifts to battery. This just about bankrupted Clark, that was famous for durable fork lifts. They continue to sell ICE fork lifts to this day, but almost all sales goes to battery fork lifts. Notice that short trip light duty vehicle market may suffer similar fate. I do notice automotive is not attempting to prejudge the future market and hedging their bets.

    It appears to me the hydrogen solution is following a similar wave of progression. Just to many advantages to hydrogen for indoor fork lift operation. I believe this a bellwether for transportation and grid power. I don’t think the battery car will amount to much. The analogy would be all the CFL hype wherein the analysis failed to rate the heat of incandescent value in cool months and only rated the heat in AC months. Also, the dishonesty of evaluations per mercury dispersal within coal plant and the concentrated under your nose dispersal within indoor air quality. Meanwhile we learn the waste within gov’t subsidy and distraction generated by the need to throw the CFL away now that the solution is apparent, LED. We experienced a net loss with the CFL distraction including government heavy handed and costly regs that didn’t amount to anything. This is the future of battery car. Distraction and costly mistake. It’s not a stop gap measure either. That lies within the bio-fuel solution camp that is more attractive at a decrease in cost per improvements of automotive technology and plain petrol product base.

    [link]      
Register or log in now to save your comments and get priority moderation!