BK: Mixed views on report about oil hitting US$100 by September
–After growth in consumption slowed last year, the early signs are that demand is beginning to pick up, led by developed markets that are responding to a period of lower prices. The Organisation of Petroleum Exporting Countries (Opec) expects demand for oil to grow by 1.17 million barrels per day (bpd) in 2015 but this is a conservative estimate. Another 500,000 bpd of crude would erase the current 1.5 million bpd surplus in the market.
–The Middle Eastern region, which controls most of the world’s oil is in turmoil, and any further escalation in conflict could easily push crude back to US$100 per barrel and beyond.
–Oil traders are beginning to turn bullish; that has already pumped up the West Texas Intermediate crude by 36 per cent in the last six months.
–China will account for roughly two-thirds of Opec’s forecast increase in demand this year and a major push by Beijing to revive growth could easily push oil back above $100.
–Royal Dutch Shell’s 47 billion pounds ($71.33 billion) bid to buy BG Group and talk of Exxon Mobil taking over BP indicates that these companies sense the crude oil price is about to turn.
The report also highlighted that the number of rigs working in US oil fields had fallen for a record 19th straight week as drillers continued to cut back in response to the lower prices of the last six months.
“I partially agree with the report, although I do not expect crude oil prices to hit $100 per barrel at this juncture,” said Malaysian Rating Corp chief economist Nor Zahidi Alias, adding that oil prices were expected to hit $65-$75 per barrel this year.
Commodities is one asset class where prices frequently overshoot or underperform their fundamentals. The existence of a huge derivatives market also explains the high volatility in their prices.
In the past few months, fear over the possibility of prices dipping below $30 per barrel had led to an over-pessimistic view on the prospects of the oil industry.
Economic problems in the euro countries and uncertain prospects in some emerging economies like China and India had also dragged down sentiment.
“However, Brent prices actually rebounded about 37 per cent from its trough in January this year. Partly, this is due to the fact that investors and businesses tend to look six to 12 months ahead when making their assessment on the future trend in prices.
“The fact that the number of oil rigs in operation has declined rapidly in the United States signals the possibility of tight supply in the near term and this will eventually lead to the fear of under-production,” said Zahidi.
“And as demand will likely rebound in view of the sustained growth of the US economy, the upward pressure on crude oil prices will likely re-emerge in the next six to 12 months. That partly explains the recent steady rise in oil prices,” he added.
In related news, Felmy: oil prices bound to bounce back.
The fundamentals were still weak amid an uneven global recovery, with a time lag from production cuts to a reduction in the supply of crude oil, said independent economist Lee Heng Guie.
Energy Information Administration data showed a continued rise in domestic production with no sharp curtailment in shale oil production.
“With the ongoing oil market surplus contributed by the still high US stockpiles and high stock levels in major Opec oil producers, it will take some time for the supply overhang to work itself out. The oil market would remain volatile as influenced by fundamentals, market news and geopolitical events,” said Lee.
Quoting the IMF World Economic Outlook report in April, Alliance Bank chief economist Manokaran Mottain noted that up to 58 per cent of the crude oil price fall between October 2014 and January 2015 was attributed to supply side increase, while the remaining 42 per cent was due to softness in demand for oil.
“Therefore, the significant supply side factor cannot be taken for granted. With increased adoption of fracking technology not only in the United States but eventually at places where it is viable, the global crude oil market price might not return to its four-year average (between 2011 to the first half of 2014) of $110 per barrel equilibrium in the medium term,” said Manokaran. Fracking is a technique designed to recover gas and oil from shale rock.
“Given the subdued global economic outlook and the softness in recent global manufacturing indicators, crude oil price is not likely to experience a sharp rebound to $100 per barrel by this year,” he added.
Since year to date, crude oil prices have been largely swayed by newsflow of the Opec conviction to maintain its output level of 30 million barrels per day, US oil rig count data and development of the Iran negotiations.
“Sentiment will continue to sway oil price direction in the short term while the oil market demand and supply equilibrium requires time to balance out. Until then, consumers around the world will enjoy lower pump prices, depending on the pricing mechanism pass-through,” said Manokaran.
To Maybank Investment Bank group chief economist Suhaimi Ilias, US summer driving season is too temporary and seasonal a factor to sustain a rise to $100 per barrel.
“The Middle East turmoil/conflict has been ongoing for quite some time already and has been less ‘impactful’ on crude oil price of late.
“China is undergoing a secular slowdown and future policy stimulus is more to prevent a hard landing rather than the inevitable slowdown of an economy that is undergoing de-leveraging, rebalancing and reforms.
“Much of the recent rise in crude oil price is a function of event-and-news driven speculation, relating mostly to oil industry and economic data which have been uneven, causing more of volatility in crude oil price so far this year than a sustained uptrend,” said Suhaimi.
He is sticking to the average crude oil price of $55 per barrel this year and $65 per barrel next year.
“Global excess supply remains large around 1.5 to 2 million barrels per day at the moment, and any removal of sanctions on Iran’s oil exports as a result of the recent nuclear programme deal will add to that,” said Suhaimi.
The next few months will be exciting for the crude oil market as we witness the interplay of data, events and news on prices, let alone the speculative positions undertaken.
