OPEC Cuts Forecasts for Rival Production in 2016

Despite freefalling oil prices, OPEC has remained steadfast in its commitment to maintaining production levels, but, according to its forecasts for 2016, it expects rival producers to lose steam in this regard. In its latest monthly report, the 12-member group outlined expectations for non-OPEC oil supply to decline by 700,000 barrels a day in the current year, a decrease of 40,000 barrels a day from its January report.

Non-OPEC producers, including the United States, have struggled to maintain profitability with the current pricing environment and have already cut costs drastically. According to OPEC's report, this has led to "announced capex cuts by international oil companies, the fall in active drilling rigs in the U.S. and Canada, and a heavy decline in older fields."

Oil prices remain low, thanks in part to excess supply and waning demand. Despite these market challenges, OPEC has thus far refused to cut its own output and support current prices, even as lower prices hurt government budgets in the Middle East and beyond. OPEC, like many analysts, doesn't expect this supply imbalance to be rectified anytime soon. On Wednesday, the group predicted world demand growth of 1.25 mb/d in 2016, a marginal decrease from previous forecasts.

Earlier this week, the International Energy Agency (IEA) delivered a similar prediction. The IEA forecast that global oil demand growth would 'ease back significantly' in 2016 from the five-year high of 1.6 million barrels a day in 2015 to roughly 1.2 mb/d in the coming months. Noteworthy slowdowns in major markets such as China, the U.S. and Europe will drive this decrease.

While all signs point toward a long road back for the oil industry, OPEC nations have refused to budge. In its February report, the group forecast that its own supply had increased in January to exceed its official output ceiling of 30 mb/d. Even as low oil prices have slowed OPEC economies, with Saudi Arabia reporting a record budget deficit in 2015, the organization has refused to budge on output and has remained openly optimistic on the outlook for global oil demand.

In particular, OPEC rebuffed fears of a slowdown in U.S. growth, stating that "positive projected growth in the U.S. economy and continued healthy growth in the transportation sector are seen outweighing downside assumptions for overall U.S. oil demand, mainly linked to fuel substitution and vehicle efficiencies." OPEC was less optimistic about European demand, acknowledging that the strong demand growth seen in 2015 was "not expected to be repeated this year."

Oil Dips Below $28 a Barrel Ahead of New Supply Data

Wednesday saw a veritable pricing seesaw between gains and losses ahead of the release of a report that's expected to show an increase in U.S. crude inventories for the fifth week in a row. March West Texas Intermediate crude traded at $27.79 a barrel, down 0.5 percent, on the New York Mercantile Exchange, while April Brent crude rose 1.2 percent on London's ICE Futures to $30.69 a barrel. The U.S. Energy Information Administration will release its weekly data on petroleum inventories later today.

According to analyst predictions, the report will likely show a rise in crude stockpiles of 3.2 million barrels for the week ended February 5. This would mark the fifth straight week of rising supply despite prices dipping below 10-year lows.

On Tuesday, the American Petroleum Institute stated that oil supplies increased by 2.4 million barrels in the most recently reported week. This supply glut continues alongside sharp losses on the markets. Oil logged a fourth straight session of losses on Tuesday, pushing crude below $28 a barrel on the back of slashed oil price forecasts by the U.S. Energy Information Administration. Despite the pushback, a supply-side response in terms of production closures or cuts is inevitable if the markets maintain their current trajectory, according to analysts.

"There is rising U.S. crude-oil inventory and no sign of discontinuing production from the Organization of [the] Petroleum Exporting Countries," Peter Lee, an analyst with BMI Research, told Marketwatch. "There has been talk about possible production cuts by OPEC members, but it seems unlikely given that they want cooperation from all oil-producing countries in the world."

Some analysts are pointing toward U.S. shale production as the first to be affected by the ongoing pricing slump. Earlier this week, Energy Information Administration reports showed expectations for a fall of 92,000 barrels a day in March production from seven U.S. major shale plays. Last year, crude oil production averaged roughly 9.4 million barrels a day. The forecast for 2016 is 8.7 million barrels a day, while 2017 oil production is expected to average 8.5 million barrels a day.

Yellen Presents Cautious Outlook for the U.S. Economy

Janet Yellen, chairwoman of the Federal Reserve, painted a cautious outlook for the U.S. economy in a speech delivered earlier today. However, she remained steadfast regarding expectations for additional, gradual interest-rate hikes in the coming months. Speaking to the House Financial Services panel, Yellen described current financial conditions as "less supportive to growth," a reference to recent volatility in stocks and other markets.

The Dow Jones Industrial Average, for instance, supports this claim. The index has already fallen 8.1 percent in 2016. If these conditions persist in the future, Yellen suggested that they could weigh on the economy.

The "downside risks" stemming primarily from uncertainty about the health of the Chinese economy also played a role in Yellen's assessment. If any of these risks materialize, a sharp decrease in foreign activity and demand for U.S. exports could hinder the performance of the U.S. economy, further tightening financial market conditions.

Yellen balanced these concerns with suggestions that the economy could manage to record moderate growth without incurring much damage, perhaps even exceeding current projections. Analysts interpret this assessment as reaffirmation of the U.S. central bank's current watching-and-waiting stance regarding future rate hikes.

Declining oil prices and longer-term rates could offer some offset to the recent market selloff. Additionally, Yellen pointed to ongoing employment gains and faster wage growth as key factors that could lead to increased consumer spending that spurs global economic growth over time.

Yellen neglected to mention the U.S. central bank's December forecast that it would raise interest rates four times in 2016. Instead, she continued to stress that the Fed was not in automatic tightening mode. By reiterating that "Monetary policy is by no means on a preset course," Yellen once again highlighted the fluidity of the U.S. central bank's strategy moving forward.

Emergency Credit Reporting Rules Discussed by Top Federal Reserve Policymaker

Federal Reserve vice chairman Stanley Fischer on Wednesday expressed concern that U.S. reforms instituted after the global financial crisis may have made it more difficult to stem a credit market panic. This warning echoed the concerns and growing stress in multiple corners of the banking sector.

Following weeks of plunging stock prices for global banks and amid growing concerns that Germany's Deutsche Bank could miss payments to creditors, Fischer targeted the 2010 Dodd-Frank law, stating that it could both help and hinder efforts to fight future financial crises. "This new system has not undergone its own stress test," he said in a closed-door conference in Washington.

According to Fischer, reforms enacted following the 2007-2009 crisis were intended to make financial firms more resistant to shocks while reducing the chances that they would use a Fed program designed to get credit to banks that were otherwise shut out of lending markets. However, he estimated that banks could become less willing to use the Fed's program now that the law requires the central bank to disclose the details of the program.

With information reported, banks will likely become subject to the problem of stigma resulting from borrowing from the central bank at a time when financial markets remain on guard. Previously, the Fed released only aggregate figures of the program, but it now publishes a more detailed report following a two-year lag.

"Indeed, some of the Dodd-Frank Act reporting requirements may worsen the stigma problem," Fischer concluded.

These concerns echoed a cautious outlook regarding economic growth presented by Fed chair Janet Yellen on Wednesday. The Standard & Poor's financial index has fallen 14 percent thus far in 2016, and banking shares have dropped steeply in Europe, led by Deutsche Bank.

Slumping European Economies Raise Concern for 2016

Europe's top four economies recorded steeper drops in industrial output in December than any analyst had predicted, a worrisome indicator as the global economy struggles to maintain its momentum. According to Wednesday's industrial output data for Great Britain, France and Italy, industrial output plunged. These reports followed similar news out of Germany released a day earlier.

Comprehensively, the reports will continue to add pressure to the European Central Bank to inject additional stimulus into the economy at its meeting next month. In a meeting last month, the Bank of England cut its forecasts, but maintained expectations to hike interest rates in the months to come. Britain, in particular, recorded a sharp drop in industrial production matching its fastest month-on-month pace since September 2012. France endured its sharpest drop since May 2014.

The figures continued to show that manufacturers across Europe are struggling against sagging demand from emerging global economies, including China. Analysts point toward struggling economies in buying markets, as well as similar industrial output figures around the world.

Following these reports, economists raised the risk that fourth quarter economic growth in the euro zone will fail to meet expectations, which call for a 0.3 percent expansion. Despite the gloomy data, however, European stocks continued to rise as concerns regarding the health of banks eased and oil prices slowly recovered.

"All in all, today's data point to another disappointing quarter for euro zone industry," Jack Allen, economist at Capital Economics, told Yahoo. "As a result, we have revised down our forecast for quarterly euro zone GDP growth to 0.2 percent."