End of 2015: What will happen to oil prices?

Baku, Azerbaijan, Dec. 25

By Vagif Sharifov - Trend:

The oil market testified a phenomenal fall in commodity prices in 2015 over the last 30 years. Since 1987 the oil price has never dropped as it happened this year by 47 percent compared to 2014. For decades, only twice the oil prices reduced during three or more years in a row - in 1991-1994 and nowadays - in 2013-2015. In all other cases, an increase was always observed for a couple of years after the fall in oil prices. The maximum growth reached 60 percent in 2000 compared to 1999.

The oil prices over the last 30 years are as follows:

Many experts are skeptical about the oil price recovery in 2016. Taking into account the manipulation, rather than any free market mechanisms, has been observed in the sharp drop in oil prices since September 2014 up till now, many market players think that the Brent price will average $53 per barrel in 2016. Although some experts find this forecast too optimistic, believing that Brent may fall up to $15-25 per barrel.

Several factors may affect the fall in prices in 2016:

- The US, which will start supplying the WTI to the European oil refineries as from January;

- Iran, which will likely to sell oil with a large dumping, given Tehran covered by international sanctions for a long time;

- The pressure from Saudi Arabia, willing to expand its market share even by reducing subsidies for the local market as a result of a decrease in dollar proceeds.

Brent price forecast for 2016:

Except for December, when on average the Brent price dropped up to $ 35 per barrel, this year the average oil price reaches around $53 per barrel in 2015. In fact, this is the lowest average oil price over the last 10 years.

The average oil price has reached $ 91 a barrel since 2005, by permanently adapting the economies of many countries to the high dollar income and expenditure. The oil price projected for 2016, almost similar to that in 2015, hampers the state budgets of many world countries to be profitable.

Fiscal break-even oil prices:

Since 2004, the last time when the oil price was at its lowest point throughout the last ten years, Azerbaijan, as an exporter of light oil, effectively invested dollar revenues into the development of its own economy. A part of the money was spared in the State Oil Fund of Azerbaijan in various currencies, and a part was allocated for the construction of transport infrastructure, the development of non-oil sector, as well as the IT development.

Given the fact that in 2015 and in 2016, according to the current data and the current forecasts, the average price for Brent will amount to $53 per barrel, this will make it possible for Azerbaijan to keep the level of economy, compensate for the missing dollar earnings at the expense of the non-oil sector, transit transportation of goods, including the Chinese ones to Europe.

Vagif Sharifov is an analyst, expert in oil and energy markets.

Follow him on Twitter: @VagifSharifov