Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

A curious thing about OPEC is that many deem it to be all-powerful when oil prices soar and also when they slump. Given Monday's 6 percent drop, the organization must be looking positively godlike in such quarters.

In fact, OPEC has become a minion of the market, competing for customers just like everyone else -- that was the message from its theatrical display on Friday of doing precisely nothing.

That doesn't mean low prices aren't having an effect that may ultimately offer OPEC the prospect of some relief, though. Oil prices will rise eventually if enough spending on new fields gets put off. That is largely a function not of where prices are today but where investors, lenders, corporate planners and executives think they are going. And the latest leg down in prices could spur yet another rethink in a year when rethinking oil prices has been a near-continuous process. 

The Gloom Boom
Short positioning by speculators in light, sweet crude oil
Source: Bloomberg

Bloomberg compiles analyst forecasts of oil prices over time. Back at the end of last year, the oil market had just been surprised by OPEC's decision to do nothing at its November 2014 meeting. Even so, this was seen as a passing phase: The cartel's genius move was expected to squeeze out the likes of shale within a couple of quarters. So the consensus was that West Texas Intermediate crude oil would average $70 a barrel this year. Given the performance to date and the latest dip into the $30s range, it looks like the year's average price will come in below $50.

Given that we are almost at the end of 2015, let's take a look in the chart below at what has happened with forecasts for next year.

Downcast
Forecasts for 2016 oil prices have been squeezed down relentlessly
Source: Bloomberg
Note: Forecasts for Q1,2,3 in 2015 are as of quarter-end.

Two things stand out. First, lingering hopes of a return to triple-digit prices had disappeared by the middle of summer. A spring rally had sputtered out but, in the meantime, had given many exploration and production companies the opportunity to raise more money or lock in higher hedges on production, keeping their supply going. Today, the consensus forecast is $53, implying average prices will barely rise next year compared to 2015.

Second, as noticeable as the drop in the consensus from $80 to $53 is the fact that the range of forecasts has narrowed sharply. At the start of the year, the highest estimate was $47, or 75 percent, higher than the lowest. Today, the gap is just $20, or 48 percent. Pessimism has gone viral.

Those who prefer to buy when everyone else is selling will actually take comfort in that consensus, which sets up the conditions for a potential short squeeze in oil prices. And the industry has to capitulate on prices, and thereby investment, before the conditions supporting a more sustainable upswing can be established.

Yet given how wrong the consensus was for much of 2015 -- especially as 2014 was drawing to a close -- it has to be asked whether today's forecasts for 2016 really represent rock bottom. One way to consider this is to compare the consensus with where oil futures are trading:

Think About the Futures
Forecasts for oil prices in 2016 have fallen but their premium to futures prices has widened again
Source: Bloomberg
Note: Figures for Q1,2,3 2015 are as of quarter-end.

Analyst forecasts are back to looking relatively high vis-a-vis where oil trades in the futures market. Granted, with oil forecasts in the low $50s already, any potential drop in 2016 isn't likely to match this year's in absolute terms. Yet with OPEC impotent and with the prospect of more Iranian barrels appearing on the scene next year, don't rule out the potential for another round of markdowns as the industry feels its way to actual capitulation. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net