Oil prices are expected to have bottomed out in January and are likely to increase throughout 2016 and 2017. A sharper rise in the prices is expected in H2 2016 as the huge supply glut is beginning to shrink.

"We have revised down our December 2015 oil price forecast to USD 41/barrel in 2016 and USD 60/barrel in 2017", says Nordea Bank.

In 2017, oil price growth is likely to slow as shale producers from the US will increase production when prices stabilise more than USD 60 per barrel. In the medium term, the increased output is likely to put a lid on oil prices until the impact of 2015's sharp reduction in investments take a toll on production growth.

In 2016, growth of oil supply is likely to surpass demand before levelling out in 2017. Even though supply continues to exceed demand growth by an average of 1m b/d in 2016, it is noticeably lesser than the 2m b/d average of overproduction in 2015. Production from OPEC will continue to increase from nearly record-high levels as Iran will boost production markedly by about 600k b/d in 2016.

The boost in production by Iran is likely to be outbalanced by a sharp fall in US shale/tight oil production. Shale production in the US has been very resilient to lower oil prices and shorter production cycles and improving techniques have boosting drilling efficiency and lowered costs in the past few years. Moreover, several shale producers had hedged their production at prices as high as USD 90 per barrel. Most of these hedges ended by late 2015 and new financing will be challenging to find.

"Even though we expect breakeven costs will continue to decline in the forecast period, US shale production is set to fall by around 600k b/d in 2016", says Nordea Bank.

All oil producers have been hurt by Saudi Arabia's strategy from November 2014 to fill the market with cheap oil to put pressure on more expensive producers. In an attempt to reduce the supply glut triggered by the OPEC's plan, oil producers from Latin America, Africa and the Middle East, which represent 73% of global oil production, have come to a tentative agreement to freeze their output at January level.

This deal is unlikely to have a meaningful effect on oil prices as Iran is not expected to participate in the coordinated freeze. Iran and Saudi Arabia are the only nations with unused production capacity and hence might be the only nations that possibly can by impacted by a freeze.

"Oil demand is expected to increase by 1.3m b/d in 2016 and 1.1m b/d in 2017, down from a massive 1.6m b/d in 2015", says Nordea Bank.

Oil demand in the EU and US grew briskly in 2015, which is likely due to a one-off effect. OECD demand, in the medium term is expected to decline as fuel efficiency requirements and fuel switching will slow demand for transport fuel. Oil demand growth will be driven by China, but at a slower rate than earlier. Meanwhile, higher economic growth in India has boosted the demand for transport fuels. With the rapid growth in India's vehicle fleet, this trend is likely to continue. Many nations, such as the UAE, Indonesia, India and Saudi Arabia have used the low oil prices era to lower costly subsidies. This might weaken the impact on future oil demand growth.