Demand not enough to boost oil price

Strong global demand for oil is insufficient to offset a robust supply outlook that has driven prices back below US$50 per barrel, and Saudi Arabia no longer appears to have the necessary market clout to change prices.

“This remains a supply-driven market,” said Michael Tran, a New York-based commodity strategist at RBC Capital Markets. “Supply drove us into this low-price environment and supply will have to be what ultimately digs us out.”

Tran thinks oil could retest the lows from earlier in 2015, but he thinks WTI prices will ultimately average somewhere in the low US$50s for the remainder of the year.

The strategist noted that Saudi Arabia’s energy strategy becomes less effective as competing countries boost production, and Tran believes the battle for market share is nowhere near its end, particularly in Asia.

He doesn’t think prices in the US$40-to-$45 range are sustainable for any lengthy period of time, and anticipates WTI prices will average US$63 in 2016. However, the backdrop remains firmly bearish due to the global supply backdrop and resilient production, as well as a glut of light, sweet oil in the Atlantic Basin.

That’s why a move higher from US$60 to US$75 will become more and more difficult, and is not a level Tran sees prices stabilizing at within the next 18 months, unless there is some geopolitical, supply-side shock.

“Demand is strong and has exceeded the expectations of many, but at the end of the day, demand can only take us so far,” the strategist said.