OPEC oil output will likely remain elevated in 2016 as U.S. volumes decline modestly, even with large cuts in capital spending and rigs. Refined product demand may increase 1% in 2016, after growth of about 3% in 2015 as low oil prices continue to stimulate demand and outrun efficiencies.

1. North American energy
2016 outlook
Vincent G Piazza, Gurpal Dosanjh, Spencer Cutter, Richard Yamarone, Peter
Pulikkan, Rob Barnett, Cheryl Wilson, Michael Kay and Brandon Barnes
Bloomberg Intelligence analysts

2. U.S oil & gas E&Ps 2016 outlook

3. Oil prices may be capped, push U.S. E&Ps into M&A

4. OPEC oil output will likely remain elevated in 2016 as U.S. volumes
decline modestly, even with large cuts in capital spending and
rigs. Enhanced efficiencies and completion methods give U.S.
E&Ps flexibility to respond to price signals, tightening the band of
price movements and limiting a sustained increase.
Geopolitical tensions and U.S. dollar strength will complicate
global energy markets in 2016. Subdued prices and potentially
tighter credit may lead to M&A, as financially distressed operators
seek options.

5. Credit availability may be roadblock for some U.S. E&Ps in 2016

6. Oil and natural gas extraction is a capital-intensive business, and
credit fuels the E&P engine. U.S. volume, a key driver of global
“swing supply,” will be more measured in 2016 as tighter credit
standards and higher interest costs suppress credit availability and
liquidity for high-yield E&Ps.
Lower oil prices damp drilling and production, promoting a cycle
of reduced cash flow, constrained spending and weaker earnings.
Hedging strategies provide support, yet operators will remain
challenged.

7. Tired U.S., restrained oil prices, wide imbalances pressure E&Ps

8. U.S. economic growth is likely to remain below its historical trend
line, with sub-2% expansion traditionally indicating a recession
may be on the horizon, based on BI Economics data. Prices for
crude oil blends and natural gas will likely remain restrained in a
slower-growth environment as imbalances persist.
Currency strength will hurt U.S. dollar-based commodities. Drilling
efficiencies and rebalanced cost structures help to partly offset
price declines, making core operators’ output more resilient.

9. North American refining and marketing
2016 outlook

10. Demand, logistics growth may boost U.S. refiners

11. Refined product demand may increase 1% in 2016, after growth of
about 3% in 2015 as low oil prices continue to stimulate demand
and outrun efficiencies. Refining margins may continue to be
driven by gasoline, as miles traveled for light vehicles remains
seasonally high due to pump prices below $2.50 a gallon.
Refiners may be more active in M&A, using strong free-cash-flow
generation to purchase logistics assets and buy refineries should
integrated oil peers shed non-core assets.

12. Refiners logistics-asset sales may dictate growth

13. U.S. refiners have been expanding their sponsored MLPs more
aggressively over the past two years, which is helping to increase
their own enterprise value. Tesoro’s MLP, Tesoro Logistics,
completed a $2.5 billion acquisition in 4Q14, and Marathon
Petroleum’s MLP, MPLX, may finalize a $14 billion takeover of
MarkWest in December.
Peers may compete to grow their own MLPs more aggressively in
2016, with the dropdown, or sales, of existing assets. There may
also be potential for M&A for mature MLPs able to issue debt.

14. New capacity likely to pressure refiner margins

15. The contracting WTI-Brent spread and new refining capacity may
pressure U.S. refiners’ margins in 2016. The capacity additions
are mostly designed to process extra-light crude produced from
domestic shale plays, which may help reduce some of the recent
glut of the product.
Refiners may still have strong incentive to make premium gasoline
because the deficit in octane is likely to continue until 2017.
Globally, oversupply of Brent will likely continue, which would
mean a contraction of the WTI-Brent spread.

16. After export deal, energy policy to take back seat

17. Now that Congress has reached an agreement to allow U.S. oil
exports, lawmakers probably won’t tackle substantive energy
legislation in 2016. With the U.S. election cycle in full swing,
presidential candidates will continue to trade jabs on energy
issues including the Keystone pipeline and climate-change
regulations.
Yet the campaign rhetoric isn’t likely to shift policy on such issues.
If a Republican wins the White House, oil and gas companies may
see less resistance to the policy changes that they support.

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insights from a team of independent experts, giving trading and
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start today and where they may be heading next.