Syed Rashid Husain Crude oil picture is crystallizing. Some recovery is underway. Yet the downward spiral does not seem to have run its full course. With the number of operating rigs in the US dropping to 1,140 — the ninth week of straight decline and industry spending cuts deepening, markets rose above $60 a barrel on Friday for the first time this year. In the meantime, markets kept emitting interesting signals. Royal Dutch Shell's chief executive conceded on Thursday supply might not be able to keep up with growing demand as companies reduce budgets. France's Total also announced trimming investment to $23-$24 billion, as against $26 billion in 2014, and the budget for exploration reduced by 30 percent to less than $1.9 billion. Apache Corp, a top US shale oil producer, said on Thursday it would cut capital spending and its rig count in 2015, keeping its output growth mostly flat. News of accelerating German economic growth during the fourth quarter also chipped in, impacting the overall market sentiment. Some gloom was thus taken off the markets. Crude will rebound in the second half of this year as low prices slow supply growth and stimulate demand, said JPMorgan Chase & Co. “Oil is starting to look beyond the glut,” Phil Flynn, a senior market analyst told Bloomberg. “Against a backdrop of massive spending cuts and rig counts, oil could make a big comeback.” Yet, positive news ends there. Recovery could still be months away. Factors impacting the markets adversely are still in play. Crude stockpiles and production in the US surged last week to the highest levels in more than three decades, the Energy Information Administration reported. Inventories expanded to 417.9 million barrels through Feb. 6, the most in records dating back to August 1982, it said. Production in the US too accelerated to 9.23 million bpd. Adding to the sentiment was also the EIA forecast that the 2015 and 2016 domestic oil production expectations remained virtually unchanged from the previous month - despite the reported cut in rig count. The Citigroup hence is forecasting that oil could even touch the “$20” mark before rising. Despite global declines in spending that have driven up oil prices in recent weeks, oil production in the US is still rising, underlined Edward Morse, Citigroup's global head of commodity research. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been striving to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out. A pullback in production isn't likely until the third quarter, Morse underlined. In the meantime, West Texas Intermediate Crude, could fall to the $20 range “for a while,” it report. With the US now donning the role of the virtual swing producer of the global crude markets, Goldman Sachs is of the view that a sharp drop in US oil rig counts has helped lift crude prices off their lows in recent weeks, but would not slow production or alleviate oversupply. “The decline in the US rig count likely remains well short of the level required to slow US shale oil production to levels consistent with a balanced global market,” Goldman said in a note. “Lower oil prices will be required over the coming quarters to see the US production growth slowdown materialize.” Crude oil's relentless downward spiral may soon be over, but its glory days appear to be in the past, J.P. Morgan too said. “In our view, the recent spike in prices and increase in volatility offer further evidence that oil markets are approaching a trough,” John Normand of J.P. Morgan said in the report. However, he warned that despite some recovery, “prices would remain near their lowest level in a decade and substantially below the $100 average of the past five years.” “Only if there is no offsetting increase in average well productivity – which seems unrealistic – does the drop in rigs imply falling production from mid second quarter of 2015.” Hence it expects oil prices will trough in March or April, with Brent futures to hit a low point at around $38 a barrel, with a shallow U-shaped recovery to around $58 in the fourth quarter. Oil prices are likely to fall further this year before they recover, with WTI possibly falling below $40 a barrel in the second quarter of the year, Tom Kloza, chief oil analyst at Oil Price Information Service, told CNBC adding that the “cycle has a long way to run out.” Dennis Gartman, the author of the “Gartman Letter” referred to the oil storage hub in Cushing in Oklahoma where an estimated 2.3 million barrels of oil is stored in tanks, and “huge numbers of ships out on the water” as also impacting the markets. “In that environment it's very hard to think that this is anything more than a much-needed technical bounce and any further $1 or $2 rally in crude oil probably should be sold. I think the lows have not yet been seen and maybe $20 a barrel is still possible.” The International Energy Agency (IEA) too is warning that a rebalancing of supply and demand “can take months, if not years, to be felt.” And, even after rebalancing, the oil market would “never be the same as what it was.” And there were reasons for this gloom. Oil stockpiles in OECD member countries may approach a record 2.83 billion barrels by mid-2015, the Paris-based organization reported. The IEA believes oil prices were likely to stay at $60 a barrel or lower for the next two years as US shale extraction continues to suppress prices. “Despite expectations of tightening balances by end-2015, downward market pressures may not have run their course just yet,” the IEA said in its report. The United States will remain the world's top source of oil supply growth up to 2020. “The price correction will cause the North American supply ‘party' to mark a pause; it will not bring it to an end.” The IEA's medium-term forecast sees prices averaging $55 per barrel in 2015. They should then start to recover but it will take five years for them to get to $73. And it was apparently in this perspective that OPEC in its monthly market report raised its forecast for 2015 demand for its own oil by 400,000 barrels a day to 29.2m b/d. OPEC now expects the US oil supply to increase in 2015 by only 820,000 bpd - roughly half the increase recorded in 2014 - taking the US output to 13.64 million bpd, during the year. Total non-OPEC supply was also forecasted to grow by 850,000 bpd this year, representing a 420,000 b/d downward revision from the group's last monthly report. Markets are still oversupplied. The glut is still around. There will be an oversupply of about 2 million bpd in the first half of 2015, Iranian Oil Minister Bijan Namdar Zanganeh said in a recent interview. And until this oversupply gets soaked, expectations of any real and sustainable market recovery seem immature.
