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Market Update: Oil & Gas - January 2016

Market Update: Oil & Gas - January 2016

Sentiment surrounding crude oil benchmarks in 2016 followed a similar vein to where it left off the previous year: bearish. The NYMEX WTI and ICE Brent contracts both fell below US$30/b, signaling one of the worst starts to a year on record. Crude prices are being buffeted from all angles. With oversupply and record inventory continuing to dictate a low price and the Chinese economy seemingly in a state of turmoil, prices dropping for an extensive period of time, beneath a psychological support level of US$30/b, appears a distinct possibility.


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Front-month Oil Price Benchmarks

US crude export renaissance

Last month, the U.S. enacted an omnibus budget bill that included the lifting of the 40-year-old ban on crude oil exports. The repeal of the ban should increase the international market for light, sweet crude oil whose production has increased dramatically due to recent advances in shale drilling technology. It should also increase the competition between West Texas Intermediate (WTI) crude oil and the current global oil incumbent, Brent, as an international pricing benchmark.

Spot WTI - Brent (per barrel)

"Despite the lifting of the ban, it seems unlikely that export volumes will surge in the short term. The narrowing of the price differential between Brent and WTI crudes creates an economic disincentive to export WTI due to the cost of transportation to move the crude. Large tanker rates are currently at relatively high values due to the large volume of crude being stored on vessels around the world. Until either transportation costs decline and/or the spread between Brent and WTI prices widens, exports should remain at a very modest trickle. U.S. crude producers will have to bide their time before they see the benefits of the export ban repeal." 

– Thomas G Ruck, Director, Market/Treasury Risk, KPMG in the US

European refining margins: The light-middle divide and emerging pressures from upcoming capacity

North West Europe Brent Cracking Margins have averaged US$4-5/bbl so far in January 2016, approximately $1/bbl below year ago levels, but substantially above 2014 lows. Margins peaked to above $10/bbl in August 2015 and have trended lower ever since - as a combination of the refinery maintenance season drawing to a close, and a steady rise in both crude and product stocks has placed downward pressure on margins. Refining utilization meanwhile has seen rates as high as 81.5% (Q4 2015) (source IEA) – the highest levels since 2007 – as refiners seek to capitalise on the low crude oil price environment. 


While the low crude oil price has been the main factor supporting refinery margins, different forces are at play across the various product groups. The light distillate complex (gasoline, naphtha) is both structurally and unseasonably strong with gasoline cracks $10/bbl higher than a year ago. On the other hand, the middle distillate complex (jet, diesel and gasoil) is struggling. We expect European conversion margins to gain in Q1 2016 due to seasonal behaviour and strong gasoline/naphtha fundamentals.

NYSE Brent Margins

Low pump prices have stimulated gasoline consumption in both the U.S. and Europe. In addition, the realignment between diesel and gasoline taxation in Europe has also spurred gasoline demand. Global demand growth for gasoline has out-performed middle distillates in recent times, as sedate economic growth in Euro-zone and BRIC economies has capped industrial production and thus diesel demand, while low prices has promoted driving activity. On the supply side, between 2010 and 2016, nearly 5 mb/d of distillate geared (hydrocracking/coking) refining capacity has been added globally, vis-à-vis only a 1.1 mb/d increase in gasoline centric cracking capacity. Europe has emerged as the cheapest source of supply resulting in high gasoline exports to West Africa, Middle East, U.S. and China. Conversely, diesel is becoming oversupplied with Russian duty reforms supporting high ULSD exports on the back of refinery upgrades and improving logistics in Primorsk, and new export refineries in SATORP Jubail, YASREF Yanbu, and TAKREER Ruwais placing incremental diesel in Europe.


In 2016, nearly 1.5 mb/d of refining capacity is expected to be added to the global refining landscape, on top of the 1.2 mb/d that was added in 2015. Key increments will come from complex refining capacity in China and topping/condensate splitting capacity in the U.S. and Qatar.

Refining Capacity Addition in 2016

"A combination of supply and demand trends has resulted in a dichotomy between gasoline and diesel making gasoline the ‘underdog performer’ while distillates have fallen short of previous bullish expectations. Incremental new refining capacity in 2016 will have a two-fold effect: first, the substantial addition of topping/condensate splitting capacity in 2016 may narrow the divergence between gasoline and distillate markets especially in the U.S. Second, refining margins in 2016 may trend below the highs of 2015 owing to higher refining overcapacity and a more balanced crude oil market following investment cuts."

Asian Shipyards: In dire straits

The offshore marine and shipping industry continues to experience a cyclical downturn as the triple forces of fleet overcapacity, low oil prices and sedate global economic growth combine to squeeze charter rates, alter trade-flow dynamics and reduce ship- and rig-building. The slump in oil prices has hit producers hard and resulted in a draconian cut-back in high-cost offshore oil production. In three major offshore basins -- the Gulf of Mexico, Southeast Asia and Brazil. -- infill drilling dropped by 60 percent between January and July 2015. As 2016 oil futures continue to hover around US$35bbl, the outlook for the marine and offshore industry for 2016 appears equally bleak.


"Overcapacity, combined with lacklustre regional production and ailing economic growth in Asia represents a bruising combination for Asia’s shipyards. The difficulties for South Korean builders are now permeating to their competitors in Japan, China and Singapore. The share prices and earnings of a number of the region’s ship and rig building powerhouses took a battering in 2015 and in the face of economic turbulence in China, the outlook appears for 2016 appears ominous. It will be interesting to see how the schism between Iran and Saudi Arabia impacts oil prices – if tension continues to escalate, it could act as a reprieve for oil prices and shipbuilders."

Oliver Hsieh, Associate Director, Commodity & Energy Risk Management for ASEAN, KPMG in Singapore

Brazil – the challenges ahead

Over the last 18 months, Brazil’s economy and oil industry has been afflicted by a perfect storm of problems. Crude prices below US$35/bbl bring severe financial challenges to producers since production is largely dependent upon costly deep-water operations. Moreover, as the economic recession persists, two rating agencies have downgraded Brazilian rates. In addition, political woes weigh heavy on the former emerging market star. The Brazilian President: Ms Rousseff, is possibly facing impeachment and the oil giant Petrobras is under severe scrutiny due to allegations of fraud in contracts with the main constructing companies and services and equipment suppliers in Brazil.


"Although Brazil faces rooted economic and political challenges, the transformation in place has created constructive and stronger policies in key sectors of the economy, such as infrastructure and energy. While a more business-friendly framework is expected for both sectors, policy implementation will be slow and difficult, reducing the prospect of significant near term investment. Nonetheless, we are positive with the changes and believe strongly that the latent potential of Brazil’s energy and natural resources sector is colossal. Remember, pre-salt reservoirs - certified by international organizations - are in Brazil, no acts of terrorism or wars, legal stability for concession contracts are in place – no risk of nationalization, the whole supply chain is already installed. These altogether could prove a real bounty for the country."

Anderson Dutra, O&G Leader, KPMG in Brazil

Norway - Strong interest in new exploration acreage in the North

In total 26 E&P companies have submitted applications to the Ministry of Petroleum and Energy for new exploration acreage in the 23rd licensing round on the Norwegian Continental Shelf. This licensing round comprises 57 announced blocks or parts of blocks, of which 54 in the Barents Sea, including the newly opened area in the south eastern Barents Sea - many of the applications target this acreage. The awards of new licences in the 23rd licensing round is expected during first half of 2016.


"Norway's 23rd Licensing Round should be on the radar for the coming year, with significant expectations for acreage in the frontier southeast Barents Sea. It clearly demonstrates that new acreage is very interesting even during a time when industry is facing low oil prices and cost cuts. Applications have been submitted by a diversity of companies; major international companies, medium-sized companies, in addition to a few small exploration companies."

Per Daniel Nyberg, Partner, KPMG Law Advokatfirma AS – KPMG in Norway

O&G supply side headlines

  • Non-OPEC oil supply is estimated to grow by 1.00 mb/d in 2015 to average 57.51 mb/d. (OPEC) (PDF 2.07 MB)
  • For 2016, non-OPEC oil supply is now expected to contract by 0.38 mb/d to average 57.14 mb/d. (OPEC) (PDF 2.07 MB)
  • OPEC NGLs in 2016 are forecast to increase by 0.17 mb/d to average 6.18 mb/d. (OPEC) (PDF 2.07 MB)
  • Global liquid fuels inventory builds are expected to an average of 0.6 mb/d in 2016. (EIA)
  • Global crude inventories are set to keep building at least until late 2016, but at a much slower pace than observed in 2015. (IEA)

O&G demand side headlines

  • For 2016, global oil demand growth is expected to increase by around 1.25 mb/d, unchanged from the previous report, averaging 94.13 mb/d. (OPEC) (PDF 2.07 MB)
  • The OECD region is anticipated to rise by 150 tb/d, led solely by the US, while Europe and Asia Pacific are seen declining. (OPEC) (PDF 2.07 MB)
  • The outlook for 2016 Japanese oil demand remains uncertain. It is largely dependent upon the development of the economy and the number of nuclear power plants that will re-start operations during 2016. (OPEC) (PDF 2.07 MB)
  • In 2016, the global economy is forecast to grow by 3.4%, with the growth risk slightly skewed to the downside. (OPEC) (PDF 2.07 MB)
  • Increased demand in India has been a bright spot for world oil exporters, which has been coined “the surprise story heading into 2016.” (PLATTS)

Analyst estimates: oil

Fragile supply-demand fundamentals have contributed to a fall in Brent forecasts in the last month. Analysts maintain their prediction of a supply overhang through 2016, before a medium-term recovery in prices as capex cuts and low spare capacity support Brent. Excess supply, high storage volumes and sedate global economic growth are all adding to bearish sentiment.


  2016 2017 2018
November Avg 57.4 68.8 77.3
December Avg 55.6 68.2 76.7
November Median 57.5 67.5 75.0
December Median 56.6 66.0 75.0
Number of estimates    18 14 11

Analyst estimates: gas

Henry Hub forecasts have fallen since last month. The market continues to be oversupplied and production remains robust despite a fall in drilling activity. An estimated strong El Nino  and a warmer-than-average weather outlook in North America for the upcoming winter could result in a more bearish outcome for 2016 prices. Record inventory levels will also be a capping factor on natural gas prices through 2016.


  2016 2017 2018
November Avg 3.1 3.6 3.7
December Avg 2.9 3.4 3.6
November Median 3.1 3.7 3.7
December Median 3.0 3.3 3.6
Number of estimates 17 13 7

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Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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