How long can the oil price rally last?
Bulls appear to have control of the market, at least in the short term
CRUDE oil prices have held up pretty well over the week. But the question on how long this will last remains.
Rising geopoplitical tensions in the Middle East have been seen as the main driver of the rise in the price of crude oil over the week.
For instance, a tweet from US President Donald Trump in the middle of the week on a possible missile strike on Syria in response to a suspected chemical weapon attack in the already war-torn country sent both the West Texas Intermediate (WTI) and Brent crude futures rising to new multi-year highs.
In levels last seen in December 2014, WTI for May delivery hit US$67.45 (RM261.67) per barrel on the New York Mercantile Exchange, while the global benchmark Brent for June settlement hit US$72.61 per barrel on the London-based ICE Futures Europe Exchange on Wednesday in response to Trump’s tweet.
In a recent Bloomberg Television interview, International Energy Agency (IEA) executive director Fatih Birol explained:
“The oil markets are very much linked to geopolitical tensions, especially if they’re in the Middle East, which is the heart of global oil exports.If tensions continue, they will continue to have an impact on the oil market and prices. Definitely, this will be a reason to push the prices up,” he said.
While oil prices have since eased from their multi-year high levels towards the end of the week, the bulls appear to have control of the market, at least in the short term.
There are factors, such as higher production of shale in the United States, that could limit further rise in oil prices.
Barclays, for one, says, while oil prices are benefiting from a “perfect storm” of stagnant supply, geopolitical risk and a harsh winter in the near term, there is a high likelihood of a downward correction in the second half of 2018.
In its April 12 note, the investment bank said geopolitical tensions should keep Brent crude above the US$70 per barrel level at least up to May before the downside risk sets in again.
Be that as it may, Barclays has raised its 2018 and 2019 Brent crude and WTI averages by US$3 per barrel. It now expects Brent crude to average at US$63 in 2018 and US$60 in 2019, while WTI is expected to average at US$58 and US$55.
Oil bulls, nevertheless, believe oil prices will likely be sustained by other positive factors.
Geopolitical tensions aside, continued weakness in the US dollar; a tightening oil market as output by Opec (Organisation of the Petroleum Exporting Countries) declines; improving demand on stronger growth in the global economy; and Saudi Arabia’s oilprice target of US$80 per barrel should provide additional support for oil prices.
Saudi Arabia, Opec’s largest producer and de facto leader, is reportedly aiming for an oil price of about US$80 a barrel to help generate higher revenue for its government to finance its increasingly ambitious domestic programmes as well as to support the valuation of Aramco ahead of the oil giant’s muchhyped initial public offering.
Meanwhile, Opec’s oil output fell yet again last month on lower supplies from Venezuela and Saudi Arabia, suggesting global markets may tighten sharply later this year.
The group’s combined output was cut by 201,400 barrels per day (bpd) in March to the lowest level in a year at 31.958 million bpd.
Oil demand, on the other hand, appears resilient at 1.65 million bpd, representing an upward revision of 30,000 bpd from last month’s report.
According to Bloomberg estimates, China’s crude imports in March rose more than 21% from the previous month to 9.26 million bpd.
The newswire says latest Opec data suggest oil inventories could decline at a rate of 1.3 million bpd in the second half of 2018. This would lead to a tighter oil market, which will help boost prices.
But the more cautious view is that higher oil prices could bring about the risk of US shale production growing at a faster than expected pace.
For instance, despite Opec production declining in March, total global oil supply actually increased by about 180,000 bpd, the bulk of which came from US shale.
This suggests that US shale would fill the gap as Opec cuts its production.
So, unless the global glut, which resulted in the collapse of crude oil prices in 2014, is fully eliminated, there will be a limit as to how far the recent oil rally could go.
According to Hong Leong Investment Bank analyst Yip Kah Ming, the recent oil rally is not a sustainable, as it is driven primarily by geopolitical tensions.
“The recent run-up is merely a shortterm phenomenon. Going forward, the rise in unconventional oil production in the United States (shale) will cause prices to fall back,” Yip says.
He maintains his oil price forecast of around US$55 to US$65 per barrel for 2018.
Needless to say, oil and gas (O&G) stocks on Bursa Malaysia had reacted positively over the week in tandem with the spike in global crude oil prices.
Sapura Energy Bhd was one of the most actively traded counters over the week. In the past five days, its share price had gained 24 sen or 48% to close at 74 sen yesterday. The counter’s gain coincided with its announcement of taking a final investment decision to develop the first phase of the Gorek, Larak and Bakong fields in the SK408 production-sharing contract.
Sapura Energy has partnered Petronas Carigali Sdn Bhd and Sarawak Shell Bhd for this venture.
Other O&G counters that hogged the volume list with upward momentum included UMW Oil & Gas Corp Bhd, Bumi Armada Bhd and Hibiscus Petroleum Bhd.
Last month, Affin Hwang Capital Research said value was emerging in O&G stocks, and recommended a relook into the sector, as earnings prospects are improving. The brokerage pointed to higher capital expenditure (capex) by global oil majors and increased in contract flows as some of the factors boding well for the O&G sector.
Petroliam Nasional Bhd (Petronas), for instance, had raised its guidance on capex spending to RM55bil in 2018 after three consecutive years of decline.
Of the budget this year, RM26bil had been earmarked for upstream development. Affin Hwang Capital revised upward its Brent crude oil price assumption to fall within the range of US$63 to US$68 per barrel, or an average of US$65 per barrel, for 2018. This compared with its earlier forecast of US$58 per barrel. The brokerage’s long-term Brent crude oil price assumption stood at US$75 per barrel.