Oil Outlook 2016: Falling Crude Price Means Good News For Consumers, More Pain For Producers

The ongoing slide in crude oil prices may be terrible news for energy producers, but it's a good sign for U.S. consumers. With large uncertainties looming over next year's oil and gas markets, fuel prices are likely to remain low, spurring consumers to start spending the money they're saving at the fuel pump.

Gasoline prices tend to follow the direction of crude prices, since U.S. refineries buy millions of barrels of oil a day. Oil prices have plunged by nearly two-thirds from their peaks in June 2014 as Saudi Arabia, the United States and other nations pump record levels of oil, even as demand wanes in emerging economies. And Iran could exacerbate that glut next year by adding 500,000 barrels of oil a day to the global market once sanctions are lifted under a landmark nuclear deal.

The price of Brent crude, the global benchmark, fell around 3 percent Monday, closing in on an 11-year low. Gasoline prices last week fell below $2 a gallon for the first time since 2009. Fuel prices typically drop in winter, after refineries finish their maintenance and switch to cheaper winter gasoline blends. But the decline this season is even deeper because of the global oil market imbalance. Regular gas now averages around $1.99 a gallon nationally, or 28.5 cents less than last year's average of $2.28, according to GasBuddy.com, a popular online gasoline price-tracker.

The continued drop in energy costs may prompt U.S. households to spend more of their gasoline savings in 2016. After more than a year of sliding fuel costs, consumers have had time to adjust their spending habits, and with a grim outlook for oil prices next year, people no longer think the lower prices at the pump are merely temporary, the Wall Street Journal reported this week.

Yet as Americans spend more cash on food, clothing and other consumer goods, oil companies and major oil-exporting nations are bracing for another year of steep spending cuts.

Saudi Arabia, one of the world's top producers, signaled budget cuts on Monday as part of its broader effort to cope with the lowest oil prices in more than a decade.

The Saudi government said it plans to spend 840 billion Saudi riyals ($224 billion) next year, down 14 percent from the 975 billion riyals it expects to spend in 2015, according to media reports. Officials projected its annual revenue would fall to 513.8 billion riyals in 2016, down roughly 15.5 percent drop from the 2015 revenue of 608 billion riyals.

"The budget comes in light of lower oil prices and economic and financial challenges on regional and international levels," King Salman said Monday on state television.

Major oil and gas producers are similarly slashing their budgets for 2016 as low oil prices continue to hack away at earnings. Chevron Corp. (NYSE:CVX) said this month it would spend $26.6 billion next year -- about 24 percent less than in 2015 -- as the company braces for an extended crude slump. Anglo-Dutch giant Royal Dutch Shell said last week it lowered its 2016 budget to $33 billion, a drop of $2 billion, or 5.7 percent, from its previous forecast.

Chevron, Shell and most major players have laid off thousands of workers this year to further curb costs, a move they're poised to replicate in 2016. All told, companies in the oil and gas sector have cut some 250,000 positions -- including drillers, truckers, geologists and personnel -- since the start of an oil-price slump that Graves & Co., a Houston-based industry consultant, estimated in late November.

North American drillers, in particular, face a growing wave of bankruptcies in 2016. Dozens of oil and gas producers this year filed for Chapter 11 bankruptcy protection or out-of-court arrangements as they struggled to service their massive debts amid the plummeting value in oil-and-gas assets. Chapter 11 filings so far have totaled around $13 billion in cumulative secured and unsecured debt, said lawyers at the Haynes and Boone LLP, which specializes in bankruptcy and energy practices.

"We see that activity not only continuing but increasing, at least through the first half of 2016," said Steve Pezanosky, a partner at Haynes and Boone.

He said many of the distressed oil and gas companies may be pushed to sell their assets to private equity firms, which are watching the beleaguered sector closely.

"There are definitely opportunities to try to make some money when commodity prices improve," he said. "A lot of capital has been gathered to buy distressed oil and gas properties."

But when and whether oil prices will improve is highly uncertain.

U.S. energy analysts forecast that Brent crude prices will average $56 a barrel in 2016, while West Texas Intermediate crude will average $5 a barrel less than Brent, or $51 a barrel, the U.S. Energy Information Administration said in a Dec. 8 report. Analysts at the investment bank Goldman Sachs said they predict prices will plunge to $20 a barrel before they recover. At that level, high-cost U.S. producers will be forced to halt production, shrinking the global supply glut and rebalancing the market.

The International Energy Agency said oil is unlikely to return to $80 a barrel before the end of the decade, even as lower prices drive substantial cuts in spending and investments.