Oil to average over $40 in 2016: Report

Analysts cut 2016 Brent price forecasts by $10

LONDON: Oil prices will average just over $40 this year, the biggest cut to monthly forecasts in a year, as an influx of Iranian barrels hits an already-saturated world market, a Reuters poll showed yesterday. The survey of 29 economists and analysts forecast benchmark North Sea Brent crude will average $42.5 a barrel, down $10 from last month’s poll. This would be the largest drop between monthly surveys since January last year and the eighth successive monthly Reuters poll in which analysts have lowered their price forecasts.

Brent crude, which averaged about $54 a barrel in 2015, has fallen nearly 9 percent so far in January and has crashed from around $115 a barrel in June 2014.

Oil prices fell below $30 a barrel this month to their lowest since 2003, under pressure from mounting concerns about the inability of even robust demand to keep pace with supply and the unlikely prospect that the world’s largest producers would agree to curtail output.

“The most immediate issue for the market will be just how much oil Iran brings back to the market ... A significant difference to Iranian production in either direction should have an impact on prices,” Capital Economics commodities analyst Thomas Pugh said. Geopolitical tensions between Saudi Arabia and Iran may prevent the Organization of the Petroleum Exporting Countries from coming to a consensus on cutting supply, analysts said.

“The chance of OPEC taking any decision to cut output is highly unlikely. Saudi Arabia will participate in the output cut only if all the OPEC members as well as other big producers (like Russia) also reduce output,” CRISIL Research director Rahul Prithiani said.

Russia’s Deputy Prime Minister Arkady Dvorkovich said yesterday the country’s output could decline as a result of lower investment, but the state would not intervene to balance the market.

That appeared to pour cold water on possible joint OPEC and non-OPEC production cuts mentioned by Russian Energy Minister Alexander Novak on Thursday, comments which raised hopes of the first such global output deal in over a decade. Record-high production from OPEC’s second-largest producer, Iraq and the addition of Iranian barrels after Western sanctions on Tehran were lifted have heightened concern that even growing demand will not be enough to absorb the extra supply.

“Even if no major event happens but supply remains more resilient than expected and demand a bit weaker, we could still see prices drift lower,” Pugh said. Analysts expect Brent and WTI futures to average $34.4 and $33.2, respectively, in the first quarter, considerably higher than what the futures market is pricing in. Oil edged up above $34 a barrel yesterday, a gain of some 25 percent from the 12-year lows seen earlier in January, on hopes that a deal between major exporters to cut production could help reduce one of the worst oil gluts in history. Brent futures have jumped by around a quarter since hitting an intra-day low of $27.10 a barrel on Jan 20. It hit a high on Thursday of $35.84.

Brent was up 40 cents to $34.29 a barrel by 1300 GMT yesterday, after gaining 79 cents, or 2.4 percent, on Thursday. US crude was up 43 cents to $33.65 a barrel, having settled up 92 cents, or 2.9 percent, at $33.22 on Thursday. Non-OPEC Russia said this week it could cooperate with OPEC on production curbs, something it had been refusing to do for 15 years since the ill-fated agreement with OPEC in 2001.

On Friday, Moscow sent confusing signals as Deputy Prime Minister Arkady Dvorkovich said Russian output could decline as a result of lower investment, but the state would not intervene to balance the market. That appeared to pour cold water on possible joint OPEC and non-OPEC production cuts mentioned by Russian Energy Minister Alexander Novak on Thursday.

However many analysts think there is still a chance of a deal. “As the headlines fly it is difficult to be absolutely sure about each word used but we don’t read ‘no meeting scheduled yet’ the same as ‘no meeting scheduled’,” Olivier Jakob, analyst at Petromatrix in Zug, Switzerland said.

“The ‘yet’ is not necessarily a ‘nyet’ and we can therefore continue to speculate about a possible meeting.” “While we view this outcome as unlikely, a 5 percent production cut by just Saudi Arabia and Russia would be sufficient to bring the market close to balance,” Jefferies said in a research note on Friday, referring to Russia’s comment.

Figures from Iran underlined the fact that there is no end in sight to the glut in the market unless there is a cut in production by major exporters.

Iran’s oil exports are set to rise more than a fifth in January and February from last year’s daily average, data from a source with knowledge of its loading schedules shows, revealing how Tehran is ramping up sales after the lifting of sanctions. “If OPEC proposes to Russia production limits that do not undermine Russia’s long-term objectives, and key Russian producers back the deal, Russia may indeed agree to production limits,” said analysts from US based ESAI Energy. —Reuters