Oil price will likely remain firm for the year

THE universal idea is that a thin spare capacity buffer will drive prices continuously higher and this deserves probing.

While price supportive, conventional capacity estimates are, we think, underestimated by at least one million barrels per day (mbpd).

Furthermore, government stockpile availability means that if a price spike does occur, it is likely to be short lived. US crude stockpiles were higher than expected based on the numbers reported on August 1. We have revised our Brent price forecasts in the second half of 2018 (2H18) and 2019 to US$ 73 and US$ 71, respectively, due to a lower supply estimate for Libya and Iran.

Yet bulls ought to beware of Saudi Arabia’s and Russia’s clear willingness to cap the upside in prices.

At this stage, it is all about commitment to a target that is set earlier. The market will be watching any deviation such as the prices which could rise to higher levels, sentiments growing thin, and oil demand, which is already faltering.

Saudi Arabia is likely to send more exports to the US, where weekly inventories affect market sentiments, in the coming months. This would be a reversal of Saudi Arabia’s strategy to remove barrels from the US market in 1H17, and such a strategy would likely weaken the strong WTI reversal.

Bulls ought not discount Saudi Arabia’s ability and willingness to protect the consumer from the US$ 80 prices. Iranian disruption might come sooner and be greater than initial estimates.

Although the US State Department has slightly backtracked its press briefing from June 26, it is still not clear how much oil will likely come off the market.

For example, on July 2, the State Department’s Brian Hook noted in response to a question about India’s and Turkey’s imports of Iranian oil.

Outside OPEC countries, the spread between WTI and Brent has narrowed significantly since May but should widen again toward the end of the year to US$ 7.50 in the fourth quarter (4Q).

Global economy would increasingly show growing pains at a US$ 80 oil price, especially in Emerging Market countries.

While the outlook for the US economy continues to be positive, the same cannot be said for other emerging economies. Global economic growth may not remain as resilient at these levels or even higher.

Furthermore, there are indications from other commodity markets including copper and iron ore, that show that the global economy is not as healthy as it looks.

In addition, many countries, including the US and India, are showing a sharp slowdown in gasoline demand in response to higher prices. The stronger dollar versus Emerging Market currencies are exacerbating this dynamic.

Despite a gloomy forecast overbearing the crude oil market, Malaysia remains hopeful, given a stronger oil price environment, that this could alleviate the prevailing debt concerns and probably shed some positive light amid the pessimism surrounding the domestic market.