Five energy surprises for 2016: The possible and the improbable

Many energy analysts like to make predictions at the end of the year for the coming year. Instead, I'll point to five possible surprises in energy--surprises because few people expect them to happen. I am not predicting that any of the following will happen, only that there is an outside chance that one or more will occur. Naturally, these surprises would move markets and policy debates in unexpected directions.

1. Crude oil ends 2016 below $30 per barrel. With oil hovering in the mid-$30 range it doesn't seem implausible that at some point in the not-to-distant future, crude oil will dip below $30 per barrel, if only briefly. What would surprise most people is if the crude oil price finished next year below $30 per barrel. The conventional wisdom is that cheap oil is giving a boost to the economy that will lift worldwide economic growth and thus demand for oil. There is also a belief that high-cost producers will simply have to stop drilling new money-losing wells after more than a year of financial Armageddon in the oil markets. This will bring down supply just as economic growth is rising, sending prices much higher as the year progresses.

The alternate view is that oil in the mid-$30 range is a reflection of an economy that has been weakening since the middle of 2014 and foreshadows a worldwide recession which should hit in full force by the end of 2016. In addition, with Iran almost certain to add to the current oversupply as sanctions are lifted and with the continued determination of OPEC to destroy the viability of tight oil deposits in the United States, the oil price could surprise on the downside, even testing $20 per barrel.

2. U.S. natural gas production declines. Despite persistent low U.S. natural gas prices, U.S. production has continued to grow. Most of the growth has been coming from two places: the Marcellus Shale where ample deposits continued to be economical in the range of $3 to $4 per thousand cubic feet (mcf) and Texas where furious fracking for oil locked in deep shale deposits also produced associated natural gas without concern for the price of that gas.

With oil drilling across the United States in precipitous decline because of low oil prices, we won't see nearly as much new natural gas associated with oil drilling as we saw in 2014 and 2015. With natural gas now hovering around $2, even the very sweetest of the sweet spots in the Marcellus are unlikely to be profitable to exploit.

Having said all this, U.S. natural gas production growth has continually defied predictions that it would dip in the face of low prices. Part of this had to do with desperate drillers carrying heavy debt loads who had to produce gas at any price in order to pay interest on that debt.

Who's right, commodities or the Fed?

As the U.S. Federal Reserve Bank raised interest rates last week for the first time in 10 years in response to what it said was strength in the U.S. economy, economically sensitive commodities such as industrial metals and crude oil continued to plumb new cycle lows.

Either these commodities are about the turn the corner as renewed strength in the United States--the biggest buyer of commodities next to China--revives industrial metal and crude oil demand--or the Federal Reserve is misreading the tea leaves and crashing commodity prices signal a world and U.S. economy in distress.

Market analysts like to say that copper is the metal with a Ph.D. in economics. Because of copper's central role in the modern economy, it often reliably forecasts the direction of the economy. Since copper reached its peak at the beginning of 2011 above $4.50 per pound, it has swooned to near $3 in 2011 coinciding with a crisis in Europe, bounced back to near $4 once the crisis passed and then settled above $3 by the middle of 2013 where it essentially traded sideways until this year. After trending down since May copper hit $2.05 a pound last week, only three cents above the low for the year registered on November 23.

And, it wasn't just copper. Nickel started the year above $7 a pound and finished last week at $3.90 a pound. Aluminum began the year above 90 cents a pound and settled last week at 67 cents. Zinc peaked near $1.10 a pound in May and now sells for 66 cents. Iron ore prices, which dropped almost 50 percent last year, this year dropped from $68 per ton to $47 as of last week, another 31 percent decline.

The zombie apocalypse in oil: Why it's a bad sign for all of us

The dramatic drop in oil prices has created what are called "zombie" companies, oil companies which can still afford to pay interest on huge debts, but little else. If oil prices stay low, the problem is likely to spread and become an economic zombie apocalypse for much of the industry and the communities and countries that depend on it.

Meanwhile, consumers have rejoiced as cheap oil prices have led to cheap gasoline, diesel, heating oil and jet fuel. Both households and businesses are finally getting their revenge on the oil companies after a decade of high and rising prices.

But should those consumers be so sanguine? Can the low prices we are experiencing today be extrapolated far into the future? The conventional wisdom says yes. It claims that the American fracking boom of recent years has unleashed a flood of oil that will keep prices down for many years to come. Combine that with an undisciplined OPEC that pumps flat out and you get not a temporary dip in prices, but a new era of low-cost oil and oil products.

Taking a short break--no post this week

I'm taking a short break and expect to post again on Sunday, December 13.