For oil, 50 is the new 40
By Waheed Abbas
Published: Sat 19 Aug 2017, 7:00 PM
Last updated: Tue 22 Aug 2017, 1:14 PM
Oil prices have been on the rise since mid-July, helped by Opec and non-Opec group members meeting held in the UAE to discuss ways to boost compliance with their output cutting pact and worsening situation in Venezuela as well some disappointing quarter results posted by some shale companies in the US. During the Abu Dhabi Opec meeting, the UAE, Iraq, Kazakhstan, and Malaysia all expressed their willingness to fully cooperate to achieve the goal of reaching full conformity. In addition, Saudi Arabia cut more than it needs in order to make up for countries that are underperforming.
Going forward, the oil price may not rally further due to projected increase in production from Opec and non-Opec producers, leaving crude to stay at $50-51 during the second-half of 2017 and 2018.
"We expect Brent to average around $51 per barrel in 2018 as we forecast increasing production from Middle East producers and non-Opec countries, like the US. This will help to push the oil market back into surplus, capping any price rallies," says Edward Bell, director, commodity research at Emirates NBD Research.
A note released by Emirates NBD Research earlier this month foresaw that Brent to average $50.25 per barrel for the rest of 2017 and $51 in 2018 and WTI to average $47.50for the rest of 2017 and $48.50 in 2018.
The Opec meeting held in Abu Dhabi last week has focused on trying to improve compliance with the existing production cut. Overall, Opec has had quite good levels of compliance but that has been on the back of Saudi Arabia cutting more than it needs to in order to make up for countries that are underperforming, he said. "But there are few actions that Opec as an institution can take to ensure compliance and if a major producer like Saudi Arabia raises output to punish others then it too suffers from lower prices."
Bell warned that any additional production cuts would most likely be self-defeating as any price gain would be capped by expectations of non-Opec producers filling the gap. Already the rally in oil prices since June as Opec discussed extending its deal into all of 2018 has created a more attractive hedging environment for US oil producers.
International Energy Agency said earlier this month that world oil demand will grow more than expected this year, helping to ease a global glut despite rising production from North America and weak Opec compliance with output cuts.
It raised 2017 demand growth forecast to 1.5 million barrel per day (bpd) from 1.4 million bpd in its previous monthly report and said it expected demand to expand by a further 1.4 million bpd next year.
Opec earlier this month raised its collective oil output for the fourth a fourth-straight month in July. The group's output rose by 173,000 barrels a day to nearly 32.9 million barrels.
The brent was trading at 50.64 on Tuesday evening while WTI was at $47.50 a barrel.
Jameel Ahmad, vice-president of Market Research in FXTM, says ongoing oversupply issue in the market is still seen as the major catalyst behind any changes in valuation for the commodity.
Sharing his views on the commodity's outlook, Ahmad sees oil price not to fluctuate any higher than $55-$60 before the end of 2017.
"The reason for this is not due to any lack of effort from the side of Opec, but because of the changing dynamics of the oil industry as a whole. Quite simply, Opec no longer have majority control of the industry and it's going to require a significant amount of time for their current strategy to have the desired impact, in terms of a gradual improvement in the price of oil," Ahmad noted.
Although Opec, he said, is doing what it can to rebalance the ongoing oversupply in the market, the group is in such a position that investors always want something more. If Opec were to commit to deeper production cuts, this would have the impact on the market that potential buyers want to see, but it would also risk producers outside of the Opec/non-Opec group taking away further market share.
"What Opec are trying to do instead, is gradually regain market share and squeeze away external competitors who have contributed to the global oversupply," he concluded.
Edward Anderson, head of UK Sales at FxPro, also echoes other analysts views, saying dollar will average around $50 per barrel.
"As the global economy improves in 2017, demand for oil will increase and further increases in supply will likely keep price around $50 for the remainder of 2017 and into early 2018," he added.
David Martin, executive director at JP Morgan Chase, says Brent will average $50/b this quarter and $52/b next. Consequently, WTI price forecasts remain at $47/b and $49/b, respectively.
"On balance we see an increase in risks to both the upside, e.g., supply disruptions, trade embargoes and healthier demand growth; and to the downside, stronger Brazilian, Canadian, and Vietnamese supply estimates. The risks that conventional non-Opec production can continue to exceed our forecasts remains a substantial source of downside price risk to the base case scenario," he added.
JP Morgan said demand growth has accelerated in recent months, hence, it raised demand growth estimates to 1.40mbd year-on-year and 1.55mbpd year-on-year for 2017 and 2018, respectively.