Analysts see 2016 oil price rise, traders bet on fall

Highlights

A year ago, after oil prices had halved in six months, analysts were forecasting a price recovery in 2015 while many traders were busy shorting the market.

Singapore : A year ago, after oil prices had halved in six months, analysts were forecasting a price recovery in 2015 while many traders were busy shorting the market.

As it turned out, the traders were correct and oil prices fell by another third this year. Analysts have now forecast a pick-up in prices over 2016, while traders built short positions on US oil futures to a record in early December.

The difference in the two views is on what happens in response to an oil output surplus that has been estimated as high as 2 million barrels per day (bpd) by some analysts.

Many analysts expect a price recovery towards the end of 2016 to pull up the average for the full year, with production - especially in the United States - falling as drillers succumb to debt and low revenues.

But traders say analysts based their outlooks for 2015 on similar reasoning and are calling it wrong again for 2016, with oil producers cutting costs to both survive over the long haul and keep pumping oil at low prices to service debt. "The party (of past high oil prices) is over, at least for the next two to three years," said Oystein Berentsen, managing director of crude oil at trading company Strong Petroleum in Singapore, arguing that oil companies have cut costs to get ready to live with lower prices for years to come.

With markets tanking in December, and Brent hitting an 11-year low just under $36 per barrel, some analysts are also starting to show signs of reviewing their forecasts.

Morgan Stanley said in its latest note, published before Christmas and headlined "Headwinds Growing for 2016 Oil", that "the hope for a rebalancing in 2016 continues to suffer serious setbacks". The latest Reuters survey of 31 analysts showed an average price forecast for Brent for next year at $57.95 a barrel, more than $20 above current prompt market values.

Yet the market is showing few signs of faith in a recovery even in late 2016. The Brent forward curve shows a price increase of under $7 per barrel between contracts for delivery in February 2016 and those expiring in the following December, a much narrower spread than in previous downturns and reflecting little trust in any increase over the year, traders said.

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