ENERGY POLICY

Energy

Beaten down oil price poised to creep up from near 11-year low

Oil will likely rebound as a glut eases, but analysts are divided over the pace and magnitude of recovery amid demand and supply uncertainties

PUBLISHED : Monday, 04 January, 2016, 7:33am
UPDATED : Monday, 04 January, 2016, 7:33am

Oil prices are set to rebound from levels near an 11-year low in 2016 and 2017 as a damaging glut is reduced, but uncertainty could hobble any recovery due to questions over the basic issues of supply and demand.

“Rebalancing of the global oil market is taking longer to occur than we expected, but this does not mean that market forces will prevent an improvement in [demand-supply balance and price recovery] in 2016 ... it is just a matter of time,” Kurt Hallead, co-head of global energy research in Canadian brokerage RBC Capital Markets, said in a report.

“Global oil market conditions should demonstrate fundamental improvement over the course of 2016 amid respectable demand growth, but a rising tide of Iranian barrels could offset much of the decline in non-OPEC (Organisation of Petroleum Exporting Countries) production ... a sustainable oil price recovery appears more in the cards in 2017.”

One of the biggest factors driving oil prices this year is the speed of production ramp-up by Iran - the world’s seventh largest producer in 2014 - after the likely lifting of economic sanctions by the United Nations early this year.

It could see its output surge 10 per cent this year to 3.2 million barrels a day from last year, according to RBC.

This is expected to be offset by production declines in the United States - the world’s largest producer, Mexico, the North Sea and Russia, as low prices saw the shut-down of high-cost fields and a drastic fall in spending to bring new fields on stream.

A global survey by RBC of 95 oil and gas producers found their combined capital expenditure for 2015 to be 27 per cent lower than in 2014, while this year’s projection is for spending to fall another 16 per cent.

Global supply growth could plummet to 0.1 per cent this year from 2.9 per cent in 2015, while demand growth is also expected to ease to 1.3 per cent from 1.8 per cent on the back of slower growth from the US and China, the top two consumers, according to RBC’s forecast.

An easing in the crude glut may see the average Brent benchmark rise for the first time in four years, to US$55.5 a barrel from US$52.7 last year, and then claw its way to US$67 in 2017, it projected.

BMI Research, a unit of ratings agency Fitch, has a less rosy view though.

“We believe the current crude oversupply in the global market will persist over the coming years ... this view is reinforced by the conclusion of the December 4 OPEC meeting in which the cartel chose to continue its policy of non-intervention in the market,” said Peter Lee, oil and gas analyst at BMI.

OPEC postponed oil supply decisions until June 2016, which deflated oil prices as the lack of coordination to rein in supply meant the glut will persist longer than the market had earlier hoped.

“We see a potential for a temporary undershoot of US$36 a barrel,” BMI analysts said. “We see a soft recovery from 2017, but expect a persistent surplus in the market to keep oil prices range-bound in the mid-50s to 2018.”

Brent oil briefly sank to just above US$36 a barrel on December 21, the lowest since July 2004 and a touch below the low seen at the depth of the global financial crisis in December 2008.

Although prices are expected to recover, their upside will likely be capped this year at around US$60 a barrel, at which onshore supply led mainly by shale oil in the United States will rise sharply, as it is lucrative enough for producers to bring partially-developed wells into production, Hallead said.

Hallead expects OPEC’s members to be more cooperative in 2016 in reining in supply, as the prolonged glut and low oil prices see their governments’ fiscal health deteriorate further.

The longer this strategy continues, the more petroleum fuel users and oil refiners will benefit. The latter will see bigger profit margins due to cheaper feedstock costs, especially those in East Asia where most of the major economies are heavy net crude oil importers.

Low crude prices also favour China, which is building up its strategic oil reserve.

“Saudi Arabia’s decision to preserve market share was logical, because price-supportive OPEC cuts would have quickly been diluted by non-OPEC supply growth, particularly from the US,” Hallead said. “Saudi Arabia’s stance has unleashed a laissez-faire oil market in which unbridled market forces are ruling.”