Breaking $40 a barrel oil
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The only certainty in the oil market is its volatility; Eberhart predicts $70 by fall
Kay Cashman Petroleum News
On news that China’s economy had rebounded to 90% of its pre-coronavirus levels and reports that OPEC+ would be meeting early to vote to continue production cuts for at least a month, Brent crude crept past $40 a barrel briefly on Wednesday, June 3. But by market close it had dropped to $39.79 with West Teas Intermediate at $37.29. Alaska North Slope crude’s trading price, which is estimated by the Alaska Department of Revenue, was $39.70.
The reversal was blamed on doubts over the ability of the OPEC+ group to agree to extend output cuts and cancellation of its early June 4 meeting, as well as heightened worries about a build in U.S. fuel inventories.
Outlook improves So, what have oil price forecasters been saying in the last few days?
Analysts at Fitch Solutions Country Risk and Industry Research have increased their forecast for the price of Brent crude oil in 2020, expecting it to average $40 per barrel this year, compared to their previous forecast of $33 per barrel.
Fitch Solutions sees Brent crude rising to $49 per barrel in 2021, a $7 per barrel increase compared to their previous projection.
Beyond that, Fitch Solutions analysts expect Brent will increase to $55 per barrel in 2022, $60 in 2023 and $63 in 2024.
Morgan Stanley raised its year-end Brent price forecast to $40 per barrel, crediting a faster balance in global oil demand and supply as countries relax coronavirus restrictions and major producers cut supply.
“We expect demand to rebound to about 97 million barrels per day by Q4 as economies come out of lockdown - a significant improvement although still down about 4 million bpd year-on-year,” the bank said.
Morgan Stanley also sees supply declining by the end of the year in OPEC+ countries, which it expects will result in an oil market that is 4-6 million barrels per day undersupplied during fourth quarter and first quarter 2021.
The bank said, however, that the recent rebalancing was primarily supply rather than demand driven with the increase in crude prices squeezing refining margins even more and oil products inventories rising fast relative to crude oil stocks.
The bank maintained its long-term forecast for the global benchmark at $45 per bar, while raising its third quarter Brent crude forecast to $35 per barrel from $30, and fourth quarter to $40 a barrel from $35.
The Bloomberg Consensus for Brent sees it averaging $39 per barrel this year, $50 in 2021, $55 in 2022, $60 in 2023 and $64 in 2024.
V-shaped recovery? “Looking at next week and beyond, it is not unreasonable to expect solid progress in terms of the price. If so, then the horrors of negative pricing seen in mid-April may be seen as some sort of turning point, after which recovery set in,” Capital.com said June 2.
“Much is hanging on the ability of the OPEC-NOPEC alliance to maintain discipline in terms of output, and also on the likelihood or otherwise of a swift bounce-back by major economies - in the jargon, a V-shaped recovery rather than a more shallow L-shaped recovery. But if these factors do slot into place, then the outlook for oil prices is brighter than it has been for some time,” predicted Capital.com, which is one of few contract for difference, or CFD, trading platforms fully compliant with the regulations laid out by the European Security and Markets Authority.
In closing, Dan Eberhart, chief executive of Canary Drilling Services, told Markets Insider late June 3 that the U.S. oil market is headed for a “mini-supply shock” with U.S. oil prices braced to rise more than 90% to $70 a barrel by fall.
“We are going to find out the U.S. producers have cut more production than they needed to so there is going to be a mini supply shock for the U.S. oil market,” Eberhart said, a prediction supported by the fact the U.S. oil rig count is falling at the fastest rate on record and that by mid-May U.S. production had dropped more than 10% to 11.5 million barrels a day. By comparison, following the 2014 oil price crash, oil production only fell by 1.1 million barrels a day, and that took a year.
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