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Oil prices too fluid yet to predict in not too distant future
Published in The Saudi Gazette on 26 - 04 - 2015


Syed Rashid Husain
Despite slipping a bit on Friday, crude oil markets are still touching 2015 highs.
Geopolitical tension in the Middle East, slowing US production growth, a softer US dollar and strong economic indicators in Europe and Asia have been lending support to oil prices, which have already surged by nearly $10 a barrel this month.
Is this a turnaround? Has the bottom arrived? Is this sustainable? The debate is on!
Some still continue to warn the recent price rise might not be sustainable given the glut on oil markets. “It's not quite a bright picture from the fundamentals side,” said Eugen Weinberg of Commerzbank, pointing to high inventories in the United States and strong production from OPEC nations. “The hard facts are rather speaking for low prices.”
The world's biggest oil exporters in OPEC are pumping almost 2 million bpd more crude than required, the highest surplus for at least a decade, data from Reuters, top forecasters and energy agencies shows.
Saudi output is touching new heights. The Kingdom produced some 10.3 million bpd of crude in March, eclipsing the previously recorded top output of 10.2 million bpd in August 2013. OPEC's total output too surged to 30.79 million bpd in March, up 810,000 bpd from February.
Michael Coleman, chief operating office at RCMA Asset Management, hence appears surprised by the rush among some investors to bet on an increase in oil prices. After the long run of high prices, he said, there's plenty of costs that can be squeezed out of the system, meaning producers can continue to pump even after prices have fallen.
“From our perspective, we don't think enough damage has been done yet to current production,” Coleman was quoted in the press as saying. “Until demand starts to significantly chew into the big inventories that have been built up, I think the markets are going to be captured by that marginal cost of supply and so we'll be in the school of 40-60 for WTI for some period of time.”
Jorge Montepeque, global editorial director at Platts too agrees, saying that even though the number of oil rigs that operating has fallen, it's not a foolproof indicator that the supply glut is being cleared. Companies will be able to continue to produce even at lower prices.
However, recent gains have prompted some forecasters to raise their projections for oil prices. Societe Generale has now raised its 2015 average price forecast for Brent by $4.33 to $59.54 a barrel and for US crude by $4.28 to $53.62 a barrel. “We also have evidence that the global rebalancing process, taking place on the back of US shale oil, is finally getting under way,” SocGen's head of commodities research Michael Wittner said in a report. However, it underlined oil prices in May and June will still be under pressure due to US oil stockpiles rising by 1.9 million bpd in the second quarter.
Wittner sees the “average” price of Brent being $58 a barrel in the second quarter of 2015, $60 in the third quarter and $65 in the fourth quarter. “US crude production has reached a plateau and is expected to decline soon in May,” he said in the note.
“What we are seeing now is improvement, suggesting a recovery within the longer term downtrend…I'm short-term bullish on Brent,” Roelof van den Akker, a chartist at ING Wholesale Banking, told Matt Clinch of CNBC. He expects the price of Brent crude to reach $72.40 a barrel in the near future. “I would not be surprised by further upside potential in Brent oil towards $78 to $80,” he added.
Hedge funds and other money managers are also eyeing a sustainable rally. Market data from the InterContinental Exchange (ICE) Monday showed that hedge fund bets on rising Brent crude oil prices last week hit record levels.
Speculators increased their net long positions for Brent futures and options to around 263,578 contracts in the week ending April 14 - meaning they were using financial products to bet on the price rising. This number was the highest level since records began in 2011, Reuters reported.
Jean-François Lambert, global head of commodity and structured trade finance at HSBC sees growth in demand for oil, leading the way out of the current low prices. Economic growth is starting to pick up in Europe, while China “is going to benefit tremendously from low commodity prices,” he said. Oil and commodities prices in general are likely to “rebound faster than expected because we are going to suddenly have in the second half of this year better [economic growth] figures,” he said.
BP's former CEO Tony Hayward too is now stressing that OPEC's strategy of maintaining the oil glut has helped drive down prices, crushing the US shale boom. He underlines that oil prices will rally sooner than many expect. Speaking at the Financial Times' Global Summit in Lausanne, Switzerland, he said the average global price will soon be around $80.
And although the oversupply in the market would likely take a year or two to work off, yet, the cuts to oil companies' capital spending were laying the seeds for the next oil price bull market, he emphasized.
“The supply chain in the US is being decimated.” US shale oil production, the source of the current battle among producers for market share, is expected to be flat this month and will decline next month for the first time in 4.5 years, he added.
Hayward also dismissed the growing view that shale oil is the new swing producer, able to rapidly increase supply when prices begin to rise. “Even if prices recover, the ability of the supply chain to respond will be severely impaired. It will take several years to get back to where were.”
Paul Horsnell, head of commodities at Standard Chartered, said there's very little spare capacity among global oil producers, and any minor disruption could trigger a rapid turnaround in the market's view. He said that spare capacity is less than 2 percent of total oil production capacity.
“There was never a glut. The global surplus in the first part of the year was 1 percent. It will be gone by July and the market will be in deficit as we move into September,” Horsnell added.
And many hence feel that OPEC's ability to cope with an unexpected surge in demand is diminishing fast. OPEC's spare capacity could halve to as low as 1.7 million bpd this year, far below the level of more than 10 million bpd in the 1980s, when Saudi Arabia last opted for market share over price.
“If the demand and non-OPEC supply responses to lower prices are similar to what was experienced in the 1980s, the very low level of spare capacity carries a risk of a price spike in the not too distant future,” analysts at PIRA Energy reported.
Markets are in a flux. And the direction is - still - uncertain!


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