Oil price prediction for 2016

After losing almost half its value in 2014, the price of a barrel of oil couldn't go any lower in 2015 could it? Well, those investors who remember the oil glut in the 1980s would have guessed they could. And they did.

Starting 2015 at $56.79, the price of Brent crude quickly fell as low as $45 before a rally recaptured levels approaching $70 a barrel – a six-month high – in early May. That optimism was fleeting, though, and a 36% decline over the remainder of the year ended with Brent at little more than $36 by early December.

There's a good chance they could go lower still. In the 80s, prices plunged to a modern day equivalent of around $22 a barrel. Most think oil will remain volatile in 2016, yet fully expect a better year for the industry and the major players and suppliers who are all scrambling to slash costs.

Broker RBC's global energy team has just issued its latest oil price forecasts, and the revisions are lower.

The average price estimate for Brent crude in 2015 is put at $53 a barrel. RBC cuts expectations for 2016 by 10% - from $62 to $56 a barrel – rising to $67 in 2017 and $80 the year after. For West Texas Intermediate (WTI), RBC forecasts $49 in 2015, then $52, $62 and $75 a barrel.

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"Global oil market conditions should demonstrate fundamental improvement over the course of 2016 amid respectable demand growth, but a rising tide of Iranian barrels could off-set much of the decline in non-OPEC production, containing WTI upside to $60/b or less," writes the broker.

"In fact, we expect 2016 WTI prices to trade in an extremely wide band of $45–60/b. A sustainable oil price recovery appears more on the cards in 2017—as longer cycle-time projects begin to lose their steam.

"Rebalancing of the global oil market is taking longer to occur than we expected, but this does not mean that market forces will prevent an improvement in balances and a commensurate recovery in WTI and Brent prices in 2016."

And, after a "dysfunctional" OPEC meeting in Vienna on 4 December, improving visibility on Iran could cause the cartel to moderate its stance next year and become more cooperative.

Oil majors Royal Dutch Shell and BP will certainly hope so. Both are furiously cutting costs and spending, and selling assets. They must, of course, to keep paying their prized dividends. Suppliers like Wood Group, Petrofac, Hunting and Amec Foster Wheeler are praying for an end to the rout, too. Could 2016 be their year?

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.