Commodities | Jul 29 2015
-OPEC not denting US shale oil production
-Question of how quickly Iran lifts exports
-Appreciating US dollar weighing on oil
-Strains on US high yield energy stocks
By Eva Brocklehurst
After a spike in April and May the oil price outlook has turned bearish. Investor sentiment has soured on the back of several global events. The events include a sharp correction in Chinese equity markets, the high profile Greek debt crisis, and the conclusion of a deal by global powers with Iran.
National Australia Bank analysts also observe a rising trend in global oil supply that is dragging on prices. Global oil demand should grow for 2015 and 2016 but the analysts expect a continued rise in OPEC production, particularly from Saudi Arabia and Iran, will outweigh any expected fall in non-OPEC output. A glut is expected to perpetuate into 2017.
The analysts note OPEC is determined to maintain production to pressure high-cost shale producers in the US. This has been spearheaded by Saudi Arabia, as some analysts suggest it is taking a pre-emptive strike to counter a potential surge in Iranian oil exports. The effective removal of sanctions on Iran is expected late this year or early next year.
While Iran has signalled its intention to lift exports significantly there are questions about the rate of recovery and actual output. Iran has the world's fourth largest proven oil reserves. The country's large geologically complex fields have not been well maintained during the period of sanctions and this signals further investments are likely before they can return to their previous productive levels.
The NAB analysts expect a modest revival in output in the first half of 2016, as Iran's oil inventory is run down and spare capacity is utilised. The speed at which Iran can expand output not only depends on overcoming some physical constraints but also successful strategies in an increasingly competitive environment within OPEC.
The appreciating US dollar is also expected to weigh on oil prices in coming months. Conversely, Australian petrol prices jumped significantly in the June quarter as the currency depreciated. This continued depreciation is expected to constitute an upside risk to domestic petrol prices and offset the effects of weakening global oil prices in the September quarter.
NAB analysts have revised oil price forecasts moderately lower for the rest of the year with prices expected to stay below US$70 a barrel until the end of 2016.
The counter-seasonal rebound in US oil inventories has not helped sentiment but Deutsche Bank does not expect this situation to persist. The broker acknowledges the weak outlook for global oil balances is unchanged, as US tight oil producers are yet to be dissuaded from increased drilling activity.
Deutsche Bank also considers the possibility that further declines in the oil price could delay a tightening in the US Federal Funds rate, given the dampening effect lower oil would have on US inflation. US Federal Reserve inaction may also assist in scaling back US dollar strength.
What is most likely is that lower oil prices will, in Deutsche Bank's view, renew the strains on energy stocks in the US high yield sector. While not placing a high probability on the scenario, the broker warns it does raise a not-inconceivable risk of a credit event in the US, which could impact financial markets in a broader sense.
Ultimately, Deutsche Bank suspects that higher demand growth is unlikely to rebalance the market. Meaningfully tighter balances are likely to appear, at the earliest, in the second half of 2017.
Morgan Stanley envisages several negatives for oil, besides the Iran news. Crude demand is nearing a seasonal peak and should decline into the northern hemisphere Autumn. Also, the US Fed is expected to raise rates by the end of the year while much of the world still maintains a bias to ease. Supply is returning from Canada and deteriorating risk appetites are limiting buying by macro funds.
The broker expects the US to end 2015 with similar or greater production than compared with the start of the year and, as result, build up stocks in the first half of 2016 from a higher starting point.
On a more positive note, Morgan Stanley suspects oil prices are near the bottom of the range and are unlikely to re-test the lows from the year to date. Healthy transport demand, capex cuts and low spare capacity, plus investor appetite, should limit the downside.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
