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

Qatar Today - - FRONT PAGE - BY SASA ZUZMAHOWSKY

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

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