Oil Price Scenarios for 2015 and 2016

A couple of weeks ago I had a post titled The 2014 Oil Price Crash Explained that was cross posted to over 20 other blogs including The Automatic Earth and Zero Hedge. In this post I use the empirical supply and demand dynamic described in that earlier post (Figure 1) to try and constrain the oil price a year from now and in 2016. The outcome is heavily dependent upon assumptions made about supply and demand and the behaviour of OPEC and the banking sector. Three different scenarios are presented with December 2015 prices ranging from $45 to $100 / bbl. Those hoping for a silver bullet forecast will be disappointed. Individuals must judge the scenarios on merit and decide for themselves which outcome, if any, is most likely.

Figure 1 The blue supply line is constrained by monthly production – price data from 1994 to 2008 and shows how supply became inelastic to demand post-2004. As demand continued to rise, prices rose exponentially to $148 / bbl in July 2008 before crashing all the way down again. The blue supply line is fitted to Brent Spot data at a time when there was no significant spread between Brent and WTI. The blue supply line in this chart is shown as a faint blue dashed line in all other charts to provide a frame of reference.

But first a look at the recent response of oil price dynamics to fluctuations in supply and demand.

OPEC spare capacity

Part of the key to understanding how the global oil market performs is to look at OPEC spare capacity data which gives a picture of how OPEC have provided or withheld capacity to try and retain order in the oil markets. OPEC suspending their market interventions has caused the recent oil price rout.

Figure 2 OPEC have tried to maintain order in the oil market. Rather than allow price fluctuations to control supply and demand, OPEC have aimed for a price that suits them and tried to maintain it by reducing and increasing supply in tune to fluctuations in global demand and non-OPEC supply. The picture of OPEC spare capacity therefore reflects fluctuations in the global oil market.

Over the past 10 years there have been three market cycles. Two of those have had roughly 3 years duration and amplitude of roughly 2 Mbpd (Figure 2). These sit either side of a larger cycle of 4 years duration and amplitude of 4 Mbpd caused by the 2008 financial crash. These cycles represent OPEC responding to global demand and non-OPEC supply changes. The smaller cycles may be viewed as “normal” and the larger cycle as rather extraordinary. OPEC intervention provided price stability of sorts. Without it we have price volatility that requires production to be balanced by varying demand and varying non-OPEC supply.

The spare capacity data suggests that demand / supply imbalance may last three years, requiring 18 months to work through to the mid-cycle point where over-supply turns to under-supply. It is by no means certain that the market will respond to the same time dynamic when we are now dependent upon natural production capacity wastage to occur as opposed to OPEC simply closing the spigot. But this is all I have to go on. The downturn in the current price cycle began last July and we are therefore just 6 months in. Another year of pain to go for the producers, that is unless OPEC decides to intervene.

Supply or Demand Driven Markets?

It is also difficult to discern if the current over-supply state is down to excess production capacity or a reduction in demand. Both are likely but my opinion is that the price rout is demand driven with many parts of the global economy performing badly – Japan, China and the EU to name but a few. These are about to be joined by OPEC, Russia and Canada.

The graphic below from the newly published December IEA OMR (oil market report) tends to confirm this view. 4Q14 supply is flat while demand is down. By 1Q15 a 2 Mbpd supply-demand gap is beginning to open tending to confirm the position laid out above.

Figure 2b The oil supply-demand view from the December IEA OMR.

Scenario 1

In 2015 demand falls by 2Mbpd relative to summer 2014 peak. New 2015 non-OPEC production capacity of 1.4 Mbpd (OPEC forecast) does not materialise leaving the supply curve as it is today.

This leaves the oil price around $60 a year from now (Figure 3). In the interim the price may go a lot lower as production capacity continues to rise before falling back to current level at year end; and because of short term trends driven by speculation.

Figure 3 Scenario 1 December 2015. Supply capacity grows and then falls back to where it is today. Underlying ills in the global economy sees demand drop 2 Mbpd from the July 2014 peak. The price ends up at around $60 / bbl, where it is today. But in the interim may go on an excursion to lower prices followed by recovery. Note that the 2014 demand line is retained in other charts to provide a frame of reference.

In 2016, low price causes a fall in global oil production capacity of 1 Mbpd and an increase in demand of 1 M bpd. These very small adjustments see the oil price rebound to $105 / bbl by December 2016 (Figure 4). Every cloud appears to have a silver lining if you are an oil producer, but global oil production capacity is cut by 1 M bpd in the process.

Figure 4 The low price of 2015 gives the oil industry a hangover in 2016 and supply drops 1 Mbpd. At the same time consumers party and falling supply collides with rising demand sending the oil price back up to $105 / bbl by December 2016.

Scenario 2

Under Scenario 2, the oil price rout causes high cost, high debt producers to default on loans creating a new banking crisis that spills over to the main economy. Re-run of 2008/9 though perhaps worse since most banks and national government balance sheets have not recovered from prior crisis.

Demand falls by 4Mbpd relative to summer 2014 peak, but supply capacity is also cut by 1 Mbpd owing to shale and other high cost operators going out of business. In December 2015 the oil price stands at $45 / bbl (Figure 5).

Figure 5 The fall in demand experienced so far causes trauma to many global producers that default on loans with knock on to banking sector and the broader economy resulting in further falls in demand during 2015. The price rout continues but is tempered slightly by non-OPEC supply being reduced by 1 Mbpd.

The low oil price works its magic on the global economy that rebounds strongly in 2016 pushing demand up by 2 Mbpd. But the $45 oil experienced in 2015 seals the fate of another 1Mbpd production capacity that is lost. Rising demand collides with falling capacity sending the oil price soaring back to $100 / bbl by December 2016. But the world has lost 2 Mbpd oil production capacity as a result of the price rout.

Figure 6 The price rout sees supply fall by a further 1 Mbpd. But the ultra low price causes a major rebound in demand of 2 Mbpd in 2016 from an “oversold” position. The oil price recovers to $100 / bbl.

Scenario 3

OPEC blinks first and with both Qatar and Kuwait cutting production in November, there are signs that this may be possible. Much depends upon Saudi Arabia who could conceivably raise production to counter the cuts made in other Gulf States. In Scenario 3, OPEC cuts production by 2 Mbpd by December 2015. While demand falls by 2 Mbpd from the July 2014 peak. The oil price recovers to $100 / bbl by next December 2015 (Figure 7).

Figure 7 Early in 2015 OPEC succumbs to pressure from several members and cuts supply progressively for a total of 2 Mbpd over the year. The net demand fall from the July 2014 peak is cancelled by the supply cut and the price recovers to $100 by December 2015.

This effectively means re-establishing the status quo of recent years. In this scenario, it is not necessary to look beyond 2015 since OPEC have re-adopted their strategy of market stability at a price that suits all – including the high-cost producers.


Each of the scenarios see strong recovery in oil price to the region of $100 come 2016. The main differences are in the extent and duration of short term pain and in the global production capacity. Scenarios 1 and 2 sees production capacity falling by 1 to 2 Mbpd come December 2016 and this would mainly be non-OPEC capacity that is destroyed handing greater control of oil markets to OPEC. Scenario 3 sees capacity maintenance and with re-establishment of status quo and high oil price, further expansion of N America. We need to wait and see if OPEC does what OPEC says.

My estimation of probabilities goes something like this:

Scenario 1: 40%
Scenario 2: 50%
Scenario 3: 10%

So my weighted forecast for December 2015 goes like this:

($60*0.4)+($45*0.5)+($100*0.1) = $56.50

Every year around this time I have a bet on the oil price a year from now. A year ago I bet $125 and my friend $110. Rarely have we both been so badly wrong. I lost again 🙁

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36 Responses to Oil Price Scenarios for 2015 and 2016

  1. Euan: Excellent piece of work.

    My weighted prediction for December 2015 is ($60*0.45)+($45*0.5)+($100*0.05) = $54.50/bbl. I’ve halved your already-low scenario 3 probability because I just don’t see OPEC – and certainly not the Saudis – cutting production first. I think the Saudis have decided that preserving their historic market share is worth a few years of privation, particularly when they can live off their accumulated fat in the meantime.

    I say “a few years” because I don’t think it’s out of the question that the price slump could go on for that long.

    Each of the scenarios see strong recovery in oil price to the region of $100 come 2016. Will this be the next “oil shock”?

    • Willem Post says:


      One item that may be overlooked is changes in the stored quantities.

      The oil producers may be at their levels, but changes in storage will readily affect market prices.

      The US has a big, underground strategic oil storage capacity. It could easily influence the market by selling some of that oil at low prices on an already glutted market.

      No hardship for the US, but major pain for some others, i.e., Russia, etc.

      A call by Obama to the Saudi’s will have the Saudi’s, the lowest cost big producer, say they cannot easily reduce production, and the US is free to play its games by releasing oil from storage into a market that is already glutted.

      • Willem Post says:

        Its capacity is about 727 million barrels. There were 2.5 million barrel drawdowns in April and May this year, which might take some time to reach the oil trading market.

  2. Euan Mearns says:

    The Oil Coup

    The above paints a picture of conspiracy to down Russia and of economic melt down. This bit is worth considering:

    Plummeting oil prices are making it harder for energy companies to get the funding they need to roll over their debt or maintain current operations. Companies borrow based on the size of their reserves, but when prices tumble by nearly 50 percent–as they have in the last six months– the value of those reserves falls sharply which cuts off access to the market leaving CEO’s with the dismal prospect of either selling assets at firesale prices or facing default. If the problem could be contained within the sector, there’d be no reason for concern. But what worries Wall Street is that a surge in energy company failures could ripple through the financial system and wallop the banks.

    Saudi Arabia, evidently working alone, is causing great distress to the international oil industry and exporting nations, in particular, Russia. They need to be concerned about their security.

    The OECD populace may celebrate cheap gasoline and diesel for a while and don’t realise that this is going to kill off the traditional sources of those vital supplies.

    In the summer, the UK North Sea required $150 in order to pay for refurbishment, expensive oil projects and decommissioning. It looks like we are going to get sub $50 instead. Low prices for high cost energy can only end one way.

  3. Sam Taylor says:


    In order of preference I choose scenarios 3, 1 and 2. Another financial crisis followed by another oil shock (would that be the 5th?) would be a 1-2 that the economy would struggle to absorb.

    Since you’re going low, I’m going to go high. I think that volatility might well be a mainstay of the markets for a while now, so I reckon this time next year it’ll be $80 and rising.

  4. Ralph W says:

    I predict that all the predictions will be wrong, except the ones that are right for the wrong reasons. This one included.

    It is clear that a large number of national economies are severely affected by the collapse in oil price. However, the physical economy and the financial markets have never been further out of touch (at least in my lifetime).

    It seems clear that production exceeds demand, and historic analysis would imply that on a decadal scale it is demand that drives production, in that price falls have preceded production falls (or smaller production rises) by a period of years. The oil industry is slow to react to price signals.

    At the same time oil is still (just) the largest single source of primary energy on the planet, and options to substitute alternative energy sources are few on a decadal scale, so that to no small extent the size of the global economy is in the long term proportional to the net energy content of the oil supply, multiplied by the efficiency with which that oil is translated into economic activity.

    After the 1970s oil shock global oil efficiency was improved by substituting oil with gas and nuclear for electricity production, and more efficient transport. However, the first transition is nearly complete, and the second suffers from diminishing returns.

    In the last decade or so, oil consumption in OECD countries has been flat to declining, but rising in BRIC and third world countries, because they use their oil more efficiently in economic turns – a pick-up in the third world bringing a harvest to market is a more efficient use of oil than an SUV driving an hairdresser on the commute from the ‘burbs to the city, even if the MPG is the same.

    However, even globalisation has to reflect the law of diminishing returns. Which leaves global GDP at the mercy of the global net energy from oil. Which is falling. Oil extraction costs have risen sharply for the marginal barrel of oil in the market, reflecting the lower EROEI for these oil sources (tar sands, shale oil, deep water, etc), Headline oil production continues to rise, but more and more of it is condensate, NGL, and even biofuels, which have sharply lower energy content than conventional crudes, and limited uses in the core market for oil, namely transportation.

    It seems likely that the net energy from oil production has fallen to the point that it cannot sustain the global economic growth at a level to sustain the oil price need to produce the high cost (low EROEI) sources. In other words, we are at peak oil, because the oil can no longer sustain enough economic activity to justify its own extraction.

    All this is heavily clouded by financial manipulation , QE, rigged markets, politics, wars, etc., but the underlying thermodynamics will eventually win through.

    I do not put much faith in the supply and demand model described here, not because it is not a good model of a functional market. but because oil is not (and probably hasn’t been for 40 years) a functional market.

    • Sam Taylor says:


      Here’s an excellent post by George Mobus on the oildrum from a few years ago: http://www.theoildrum.com/node/6814

      You might find that a more realistic model of how the oil market functions. It’s certainly given me a lot of food for thought. Anyway I think we can very likely expect the old high prices back soon enough.

    • Euan Mearns says:

      Ralph, I think there is undoubtedly a grain of truth in what you say. The high cost (low ERoEI) of accessing these marginal barrels has acted like a drag on the World economy that has now decided to stop demanding it.

      But I think it is more insidious and complex than that. European energy “policy” is forcing expensive unreliable energy upon the populace undermining economic growth. Ask the question would Europe be demanding more oil without its Green energy policies? These policies are doing three things. They are increasing the amount of energy in the system depressing prices. The energy itself is low grade and expensive. And the policy is undermining economic growth and demand.

      On the peak oil question, this is a conundrum that I must try and address some time soon. But Green energy policies are designed to force FF use out of the system and it seems to be working. The morons running our energy policies are, however, about to learn a very profound lesson. Hobbling Green energy policies can be added to the list of motives for current action.

      Market system is survival of fittest. Not survival of most.

      • Ed says:

        Green energy policies shouldn’t reduce the current growth in GDP as it still requires energy, resources, and provides employment. For every unit of energy used to deploy a wind turbine (for example), it will give back 10 or more units of energy throughout it’s lifetime. Therefore in the long term the wind turbine (for example) is a net contributor to GDP.

        A bit off topic, but I had to respond, Euan.

        • Euan Mearns says:

          Green energy policies shouldn’t reduce the current growth in GDP

          Explain how this works then Ed. The key word here is growth. Simply producing GDP and energy is not good enough. To have growth, the new has to be better than the old, and its far from that.

          This kind of condenses the issues. Of course we can have a society that runs on renewables. But it is not the same society we have today. And given society’s expectations for more, getting less instead creates major problems.

          • Ed says:

            Renewable energy is not replacing FF energy, though Euan.

            The energy production increase obtained from renewables have been totally absorbed by our growing population, currently growing by 400,000 per year in the UK. Therefore renewable energy is not the problem. Our growing population is.

            Maybe that is the fundamental difference between your worldview and mine. You still think growth of GDP per capita is possible (if only we develop Nuclear).

            Where I do agree with you, Euan, is when you say, “society’s expectations for more, getting less instead creates major problems.”

            There is no way we are going to continue to consume a average of 200 kWh/day per person in the medium term. The implications are going to be profound and the general public will have trouble dealing with reality. They will not understand why there isn’t enough money for health care, pensions, road repairs etc because they don’t understand the role of energy in wealth creation.

          • Raff says:

            To have growth, the new has to be better than the old, and its far from that.

            How so? If a fashion for retro gear develops (vinyl and turntables, jeans with holes pre-worn into them), their manufacture, distribution and sale still contributes to the economy even though they are arguably not “better” (in some unspecified way) than what they replace. Maybe you need to define what you mean by “better”.

          • Euan Mearns says:

            Maybe you need to define what you mean by “better”.

            The conversation is about ERoEI so I don’t need to define it. I suggest you amuse yourself for the next 6 months by reading these posts (though you maybe have to be a registered user to access this link)


        • Willem Post says:


          I think you have it backwards.

          The RE added in Germany is displacing gas, but not yet coal, because energy is needed to replace decreasing nuclear energy.

          Whereas CURRENT additions of RE are lower in cost/kWh, the legacy costs/kWh, at which subsidies are paid, are much higher.

          In case of PV solar in Germany, it is about 34 eurocent/kWh which is slooooowly decreasing.

          That energy has a wholesale value of about 4-5 eurocent/kWh!!!

          The more Germany engages in such a folly, the less growth it will have, unless it finds OTHER ways to offset that headwind, such as by EE.

          Here is are some articles:




          • Ed says:

            Growth is DEAD. If you haven’t noticed Willem, the GDP per capita of the UK is still below 2006 levels and way below the peak level of 2008. ie we are no better off than we were 8 years ago, even though our debt levels have vastly increased (borrowed from the future) !!


            We need to prepare for the decline in fossil fuels NOW by building out renewable, locally controlled energy sources and which also includes a strategy to reduce our population through tax incentives and public education.

      • Ralph W says:

        The UK is slowly but steadily becoming more energy efficient.


        lot of this is down to government and EU interference in the market by mandating more efficient appliances, and demanding better insulation in houses, and putting massive taxes on transport fuels, and banning incandescent bulbs.

        But part of it is also small scale and unmetred renewable energy sources reducing net demand. From a macro-economic sense these are a dead loss, compared with more efficient , large scale developments like offshore wind, but on a personal household investment level – do I remodel the kitchen or fit a condensing boiler? Do I install solar thermal or buy a flashier car? Tough choices.

        The future is local.

    • Ed says:

      Ralph, I think you have made an important contribution to this discussion.

      Namely: 1. The peaking of net energy production of oil is somehow contributing to instability in the price and 2. The financial system of capital allocation has broken down so it is no longer pricing oil correctly.

      Both need fleshing out. I need to do some thinking.

      • Jacob says:

        Ed says: “Growth is dead”. Maybe.
        But do you think it is possible that people will accept economic hardship while there is still cheap energy available underground (coal, gas, oil), and leave that energy underground, while being forced to use expensive and unreliable RE?
        The ERoEI of oil may be getting worse all the time but it is still about x10 better than RE.

  5. Olav says:

    Beeing optimistic here. I believe oil will rebound much earlier. We have had $110+ price for several years now and demand was still increasing but slowly. Now when price is much lower then demand should rise faster. Shale oil producers may be in difficult situation now and one possibility is to get investors onboard on the strategy of delay fracking on drilled wells until price gets up. Why produce and sell for 40 now when you can sell for 80 around the corner. Then we will not have massive defaults and a financial crash which authrities will prevent. Leman Brothers was a lesson which will be prevented happening again at “any cost” Banks will be bailed out especially as assets as oil in the ground will have high rating as security.
    The combination of demand increease and big drop in shale oil production will have its price effects. Shale oil production has lately beeing hailed as an energy revolution which is not the case. It is a “scraping the barrel” activity by producing from source rock. It will always be a more expansive production, beeing lucurative when price is high together with large low populated shale bearing areas and at a location where the oil service companies is driving the technology and innvation forward. This is not the case outside North America as european shale oil has not been a sucess yet. Again shale oil is expansive as I have not heard about any shale oil beeing produced offshore. Oil price will also go up also because the effect of believing shale oil as saviour for BAU is ended.

    • Ed says:

      If shale oil companies start to default on their over leveraged positions then the counter-party risk could freeze liquidity in the financial markets again. This is a real risk but I would have thought that there is lot of scrambling going on in the background at the moment to stop this happening. It is not only new shale gas production that will slow down at current prices but also new investments in the North Sea.


    • Javier says:

      That was not the experience during the last time this happened, the oil glut of the early 80’s. When demand destruction is the cause (or one of the causes) of falling oil prices, the low prices will not stimulate demand until the business cycle runs its course. That can easily be a couple of years.

  6. Calgary says:

    A quick question. Can you please explain why the horizontal axis is 60 through 78 million barrels per day, which is noticeably below supply and demand going back to 2004? Thanks.

    • Euan Mearns says:

      Good question. I should have explained that. The data I’m plotting on x-axis is from the Energy Information Agency (EIA) monthly stats for crude oil + condensate (C+C). The much higher total liquids number currently floating above 90 Mbpd includes natural gas liquids, biofuels and refinery gains.

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  8. Florian Schoepp says:

    Dear Euan,
    first, thanks for another interesting post.
    I know it might be a bit off topic but what about natural gas? Drilling peaked in 2011 and production has plateaued since. Although the number of drilling rigs for NG has been reduced substantially, the amount of NG has barely moved. I understand that in 2012 a few hundred wells might not have been completed, so some overhang. But 2013 and this year? I was expecting that the shale gas wells would deplete at a rate of 50% or so in year 2 (2013?)< and another 25% in year 3 (2014?). But that did not happen. Do you have any explanation? Maybe my data is old/wrong…

    • Euan Mearns says:

      Florian, you can check out this post. Its the most read on Energy Matters with 12,936 reads to date.


      I presume you are asking about US gas production. What has happened there is the US more or less reached self-sufficiency. So they cannot produce more until LNG comes along, if it ever does. About 400 rigs are drilling gas, and these presumably are adding enough new capacity to compensate for declines. You currently have a system that is in balance.

      PS – new commenters have to have the first comment approved, from there on your comments will appear immediately for so long as you are well behaved 😉 I deleted your duplicates.

      • Ralph W says:

        An additional factor is that oil wells also produce gas. The proportion of gas/condensate/oil varies with the geology, but shale in particular produces a lot of gas and condensate and mostly light oil. The split between rigs drilling for oil and rigs drilling for gas is to some extent arbitrary. They all come out of the same hole in the ground.

  9. Florian Schoepp says:

    Thank you for your fast reply. I think I am just disappointed that the shale wells are not depleting as fast as thought and that self-styled experts as found on Bloomberg/CNBC can still trumpet about “energy independence ” and “100-year-gas supply”.

    PS – I promise to behave!

  10. WmWatt says:

    The speculations here are engaging and stimulating. Supply data for 2015 is already available for producers listed on stock exchanges through revised guidance figures issued to shareholders. There have been many reported in newpapers given the general interest in reduced capital spending and production. The information can be found on company websites. There are sure to be oil analysts at investment houses busily adding up the figures as I write. Since much of the interest in supply is concentrated in North America it’s nice to have the data publicly available thanks to investment regulation.

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  14. Paul Coney says:

    Many great comments. Some unknown, unpredictable factors: Why is Saudi Arabia selling its crude cheap ( I mean they are consuming increasing amounts of their own production, their population is rapidly increasing, and they like more money, rather than less). So what is their game(rhetorical Q). King Abdullah is 90 plus and who knows what will happen next. Oh, and like the book Twight Light in the Dessert of ten years ago, we don’t know what cards / crude is in Saudi Arabia and what the prospects are.
    I don’t have the numbers but I think full loaded costs are higher for most US producers and the net is lower after transportation to refineries. As the financial numbers for December year ends come out in early February, we will see the reality. Capex for new drilling will collapse since banks won’t loan / hedge to losers. Like people in line at the restroom, ppl / O&G companies will be quickly forced to do something since most don’t have the working capital to go it alone. Finally, drawing trend lines is an idiots game. The recent unpredicted volatility and near term uncertainty makes trend drawers and pundits look like Chicken Little.

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