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Taking the high road FirstEnergy says oil price has reached ‘bumpy bottom’; investment dealer analyst says signs price ‘peaking around the corner’ GARY PARK For Petroleum News
Calgary-based investment dealer FirstEnergy Capital has offered a ray of hope amid a broadly dismal outlook for crude prices, even though its upper target is still only US$78 per barrel by 2018.
Martin King, an analyst with the firm, said FirstEnergy bases its view of a “positive turning point for crude” on U.S. Energy Information Administration forecasts that production is likely to decline through mid-2016, while Saudi Arabia and Russia have signaled their efforts to reach agreement on support for oil prices.
“It’s a bumpy bottom,” King said in an oil and gas market update. “It’s not necessarily a rocket ship back to the top.
“We’re peaking around the corner. It is getting a little bit better. There are things you can point at that suggest the market is actually improving.”
FirstEnergy’s optimism sees a gradual recovery for West Texas Intermediate values of $50 this year, $57 in 2016, $68.50 in 2017 and $78 in 2018.
On the down side On the gloomy side, Goldman Sachs Group said in September that a $20 price might be needed to clear the oil glut, trimming its own average for 2015 to $45 as part of its expectation of a drawn out supply surplus.
A Wall Street Journal survey of 13 investment banks yielded an average WTI forecast for the remainder of this year of $54.40 a barrel, down $9 from August, with a consensus view that crude will remain lower for longer because of the supply glut rather than weak demand.
The EIA assessment concluded that exports from the United States would reduce the risk of market distortion and offer a market for crude should U.S. refinery capacity not be able to keep pace with production.
Using a reference case of U.S. production at 10.4 million bpd from 2020 to 2025, the EIA estimated that even if exports are introduced, U.S. refineries could process all of those volumes, although that forecast did not take into account the fact that most refineries process heavy crude.
But, sticking to FirstEnergy’s more upbeat view, King said the market is beginning to “balance.”
He said that although OPEC is expected to continue to pumping high volumes, U.S. crude supplies are easing and there is ample storage space.
Strong economy Even though the long-term demand for oil in the U.S. is predicted to slide, the U.S. economy has been strong and large vehicle sales are up, King said.
“U.S. demand has been gangbusters this year,” he told the Calgary Petroleum Club. “They are finally back on the road driving lots and lots of miles, burning up gasoline. I love that kind of stuff.”
King also said Iran’s re-entry into world crude markets in 2016 will have only a “moderating” influence on prices, while Chinese demand will hold up better than many forecasts, but he noted that both of those factors hold keys to prices.
Referring to Suncor Energy’s hostile C$6.5 billion bid for Canadian Oil Sands, he said that bolsters the FirstEnergy outlook.
“Typically, when you look at these cycles over time, when you start to get more (mergers and acquisitions) that’s usually a sign you’re at bottom,” he said.
King said he does not expect new pipeline capacity out of the Alberta oil sands to be a key concern again until 2018, or even later if oil sands output growth slows.
“What we can’t get to the market through pipe, we can deliver by rail,” he said.
King said that even if TransCanada’s Keystone XL pipeline is rejected by the U.S. government “crude will still flow (out of Canada). There are still opportunities to get into the U.S. market.”
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