$50 oil by year-end as 1.4 million bpd oversupply remains in 2016

Dubai - The global strategist of Societe Generale's private banking arm Xavier Denis said oil prices are expected to trade between $30 and $40 a barrel in the first half of the year.

Oil prices are likely to remain at low levels of $50 a barrel as an estimated 1.4 million barrels per day oversupply will not disappear before 2017, according to an expert.
The global strategist of Societe Generale's private banking arm Xavier Denis said oil prices are expected to trade between $30 and $40 a barrel in the first half of the year while in the second half it will be ranging between $40 and $50.
"Saudi Arabia is still pumping at full speed and last summer's nuclear deal is paving the way for Iran to return to the oil export market. In the US, efficiency gains have allowed non-conventional oil producers to slash production costs by 20 per cent," Denis told Khaleej Times.
Referring to the bank's macroeconomic outlook, he said the emerging market slowdown has led to a series of downward revisions in global oil demand.
"In our view, oil prices should remain stuck at low levels - between $30 and $40 in first half, and between $40 and $50 in second half - and any upside is likely to be short-lived," he said. 
Focus on Opec
Denis said GCC governments will continue to streamline spending to reduce fiscal breakeven oil price levels [$/bbl] in a lower-for-longer oil price backdrop.
Elaborating, he said Saudi Arabia, with the largest fiscal spending base in GCC, has already cut spending by 14 per cent to cancel non-essential projects. The country would also gradually adjust the domestic prices of water, electricity and petroleum products over the next five years.
Qatar's budget announcement in December included a seven per cent cut in spending with a reduction in operating expenditure but the breakeven remains higher in 2016. Oman's budget announcement also included a 11 per cent cut in spending.
"Opec's strategy to pump full-speed has so far proved insufficient to force non-Opec countries to throw in the towel. Despite a declining oil rig count, US oil supply has not slowed much. Although the Russian Energy Minister said that a deal with Saudi Arabia on production cuts was possible, nothing has been done yet," he said.
At current levels, he said Opec members are unable to balance their fiscal budgets as countries carrying high production costs, such as Venezuela, went into deep recession in 2015.
"Opec members, whose growth depends heavily on oil revenues, are drawing on their currency reserves to finance expenditures. This is also true of Saudi Arabia, with reserves tumbling 14 per cent, or approximately $100 billion, since oil prices started falling."
Denis said declining oil prices will fuel global consumption. The major consequence of the energy price slump is an increase in purchasing power, especially in those economies where the drop is fully reflected at the pump.
"With low interest rates, especially in the euro area because of the ECB's quantitative easing, this improved buying power should mostly be directed towards consumption rather than savings. Globally, we expect strong profit growth from consumer discretionary stocks in first half of 2016," he said.
- muzaffarrizvi@khaleejtimes.com