The case for $50 oil
FOLLOWING FEARS OF SLOWING OIL DEMAND AND A GLOBAL CRUDE GLUT, A CHANGE OF HEART IN THE MARKET BROUGHT HOPES OF OIL RISING AT LEAST TO $50 A BARREL BY THE END OF THE YEAR. BUT THE OPTIMISM IS ALREADY STARTING TO DWINDLE IN THE FACE OF MARKET REALITIES, ES
In recent months a number of optimistic forecasts could be heard from the experts in the oil industry. The International Energy Agency (IEA) said it can see a “light at the end of the tunnel as prices might have bottomed out”. The Goldman Sachs Group in March mentioned that it is “spotting green shoots” and said the company expects oil to trade at $25-45 per barrel in the second quarter of this year, while it trimmed its 2017 WTI crude price forecast to $57 a barrel from $60.
RBC Capital Market's head of global commodities strategies, Helima Croft, told CNBC that the market's psychology has changed. “Everyone is now thinking about the recovery to $50,” she said, adding that OPEC's freeze talk has influenced market sentiment. Societe Generale as well was convinced that fundamentals support $40 oil, and that by year-end the market will see $50 oil.
Sanford C. Bernstein & Co. went even further, saying the argument that $50 represents a ceiling for crude is flawed and forecasting prices returning to $70 in the next year. The industry can't stay profitable at current price levels, having lost $3 for each barrel produced last year even as companies squeezed costs, it said. “The price of oil has to rise to balance the market in the medium run, and the medium run might be sooner than people think,” the firm's Senior Research Analyst Bob Brackett said in a report.
It's true that international benchmark Brent crude hit $43,47 at the time of writing, a 61% rally off the February 11 low of $27 a barrel, but the question is: what was its foundation, and above all, will it last? And while the oil price remains well above the lows it had hit early in February, analysts warn that prices will remain in this range and even be vulnerable to another sudden downward shift.
Why the optimism?
In the oil market, nothing has really changed. Demand is still slowing, there's still a supply glut, there were no major shake-ups among producers and no agreements were signed yet. So where did all this optimism stem from? Saudi Arabia and Russia are pledging only to limit their output to some ten million barrels a day, an amount near record highs, which is unlikely to rebalance an oversupplied market. Iran, on the other hand, has made clear it will increase production and the market's already seen shipments from Iran to Europe. Reuters estimates that supply has risen from one million to more than three million barrels a day, and the BBC reported the country's oil minister saying it will not discuss any deals until it has matched its pre-sanctions level of four million.
In Helima Croft's view, Iran is set for 5% growth rates this year because of sanctions coming off. “Iran seemed to deep-six any idea that it would sign on for an OPECRussia plan to freeze output as its energy minister again stated that the country would only consider a cap on production once it reached 4 mb/d”, she told
in a statement. “It remains to be seen whether this is the final word or an attempt to exact better terms. Iran may not feel the same economic urgency as other OPEC members, as it is the only one facing a brighter outlook on a year-on-year basis even in the current price environment, as it is set to benefit from the lifting of sanctions.” Nonetheless, she points out, it is also worth remembering that the Supreme Leader publicly announced a set of inflexible red lines in the late stages of the nuclear negotiations, only to backtrack later.
Meanwhile, OPEC predicted that demand would be lower this year than expected and would average 31.52 million barrels per day in 2016, while the organisation's last forecast said production was holding at levels that exceed the amount of oil it is selling. As Societe Generale's Global Head of Oil Research, Mike Wittner told
“We don't believe that any OPEC and non- OPEC freeze that may be agreed (which we assume will exclude Iran) will affect market psychology and will be meaningless in terms of real crude supply.”
Moreover, the IEA reported last week that US crude inventories for the week Today Qatar Today, Qatar
"We don't believe that any OPEC and non-OPEC freeze that may be agreed (which we assume will exclude Iran) will affect market psychology; it will be meaningless in terms of real crude supply." MIKE WITTNER Global Head of Oil Research Societe Generale