Six factors can affect oil price in 2016

Baku, Azerbaijan, Jan. 15

By Vagif Sharifov - Trend:

There was a recovery in oil price this week, though it has remained relatively low since early January 2016 - at an average of $33 per barrel of Brent, compared to $38 in December and to $49 in the same period January 2015.

Brent spot price has been falling from Jan. 11 through Jan. 14, but the amplitude of the price fluctuations is calming down with each passing day - something that hasn't been seen for a very long time.

For instance, there was a $1.9 per barrel drop in Brent price Jan. 8 as compared to Jan. 7, which is a record figure since October 2015, whereas yesterday, on Jan.14, the price fell only by $0.05 per barrel compared to Jan. 13.

Below are the prices for Brent Dated spot and dynamics of price changes.

Bloomberg has talked to 40 economists, who believe that by late 2016, oil prices will reach almost $60 per barrel versus $52 per barrel in 2015. Meanwhile, some experts have said that if Iran and Saudi Arabia start open hostilities, oil prices will go up and reach $250 or $300 per barrel.

But such a situation, if it indeed happens, can last for quite a short period. Over the last 30 years the oil price reached its highest level in 2008 when a barrel of Brent oil was worth of $144.

Here are the six factors that will greatly affect oil price in 2016:

1. The conflict between Iran and Saudi Arabia, and its escalation, including the potential risk of failure in crude supplies through the Strait of Hormuz. One-third of the global maritime oil supplies pass through exactly this strategic strait

2. Increase in Iran's oil export and production against the backdrop of the upcoming removal of international sanctions on the Islamic Republic.

Tehran has already said it is ready to use its tanker fleet for crude transportation globally, while the American investment banking firm Goldman Sachs predicts that Iran's oil production will rise to 3.133 million barrels per day in 2016, as compared to 2.847 million barrels per day in 2015.

3. Saudi Arabia's continuing to increase its oil supplies to the global market with an intention to expand its own market share. Riyadh, by increasing the oil export and simultaneously dumping prices, is trying to reduce Russia's market share, and meanwhile is waiting for the US oil companies go bankrupt.

Experts believe the Saudis are ready to tolerate the low oil price for a long time. They intend to partially compensate the budget deficit through Saudi Aramco's IPO.

4. The US Energy Information Administration (EIA) has predicted that the world oil supplies will grow to 95.93 million barrels per day (bpd) in 2016. Over 40 percent or 39.16 million of this figure will account for OPEC countries.

The EIA has also forecasted that the oil consumption in 2016 will stand at 95.19 million bpd.

5. Macroeconomic indexes and trends in the Chinese market will be of utmost importance for determining the world oil prices in 2016. China bought the first-ever batch of the US oil on Jan. 15. The purchase allowed the US to test the logistics after the recent oil supply to Europe.

6. An OPEC meeting in March, offered by the cartel's head, where investors will wait for new decisions on quotas, can be another factor affecting oil price in 2016. Meanwhile, I don't see any desire in the majority of the OPEC member states to change anything in the current situation.

Previously, in my article titled Global redistribution of oil market, I predicted that, "The situation [on the market] will lead to an unplanned meeting of OPEC in the first six months of 2016, where the countries will blame each other of deliberately glutting the market. But no decision will be taken to cut the production..."

Aside from that, Iran and Saudi Arabia are unlikely to agree on anything within OPEC amid the deterioration of their relations.

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Vagif Sharifov is an analyst and expert in oil and energy markets. Follow him on Twitter: @VagifSharifov