Oil Price to bottom at $65 – $75 per Barrel

Energy analysts across the globe see the price of oil hitting a bottom in the near term, with the expected target price ranging from $65/b to $75/b.

The price of oil has dropped by 28 per cent from June, spurred by slow/stagnant global economic growth, slow growth in oil demand, and increasing oil supplies from shale oil in the US, record oil production in Russia, and the resumption of production in oil producing countries plagued by unrest.

WTI Crude dipped below $75/b earlier last week – the lowest in four years; and Brent Crude has been trading at/above $77/b.

Despite this decline, oil prices are expected to fall even further as the global market remains bearish on account of a slump global oil demand, and the reluctance of members of the Organization of the Petroleum Exporting Countries (OPEC) to cut output.

“The sentiment is really bearish; $75 is the technical target,” Kyle Cooper, director of commodities research at IAF Advisors in Houston, said by phone to Bloomberg.

JPMorgan, on the other hand, in a report released last week, expects a more bearish outlook in the market. “In the short term, we now expect OPEC to be unable to reach an agreement in its end-November meeting. Consequently, the prospect of oil inventories increasing substantially in excess of seasonal norms will likely pressure prices,” JPMorgan analysts David Martin and Upadhi Kabra said.

Without an agreement by the OPEC members on production cuts, Brent prices are expected to fall toward $70 per barrel in December, and could sink to $65 per barrel by early January, the analysts said.

Brent Crude currently trades at $77.74 per barrel, implying a further 9.9 per cent decrease in its price to the midpoint of the target range ($65/b – $75/b).

Gregory Kronsten, FBN Capital Chief Economist, at the 2014 FBN Capital Investor Conference, pointed out the factors that will mitigate oil price weakness in the near future, leading to a bottom. “Oil price will be contained by the high extraction cost of shale and Russian production, demand driven by northern hemisphere winter, and favourable geopolitics”, he said.

Shale oil, which has been a key driver of the oil supply glut, is high cost oil, and its production will be hurt by further declines in prices. At $80/b, output from shale producers would grow by 5 percent, down from a previous forecast of 12 percent, according to New York-based ITG. At $75/b, growth would fall 56 percent to about 500,000 barrels a day, according to Vikas Dwivedi, an oil and gas economist from Macquarie. Closer to $70 a barrel, the growth rate would drop to zero, he said.

Shale producers are starting to feel the pinch of a weakening oil price. A recent Bloomberg report revealed, “that at current prices, drilling rigs targeting oil in the U.S. fell for the third time in four weeks, a signal that the price drop is causing some producers to scale back plans. The Eagle Ford shale formation in south Texas lost the most, dropping nine to 197 rigs, Baker Hughes Inc. said on Nov. 7.”

For 2015 and longer term outlook, the annual World Oil Outlook released by OPEC forecast that oil prices would shoot back up again.

For the OPEC reference basket (ORB) price, “a constant nominal price of $110/b is assumed for the rest of the decade, corresponding to a small decline in real values. Moving further forward, real values are assumed to approach $100/b in 2013 prices by 2035, with a slight further increase to $102/b by 2040. Nominal prices reach $124/b by 2025 and $177/b by 2040”, according to the report.

The forecast is based on expected growth in demand and a slight tapering of global supply.

According to the report, on the demand side, the world oil demand will keep rising by at least 1 million barrels per day throughout 2019. Over the 2013–2019 period, total non-OPEC oil is to increase steadily by 6.4 mb/d over these six years from 54.2 mb/d in 2013 to 60.6 mb/d in 2019.

However, on the supply side, the amount of OPEC crude required will fall from just over 30 mb/d in 2013 to 28.2 mb/d in 2017, and will start to rise again in 2018.

By 2019, OPEC crude supply, at 28.7 mb/d, would however still be lower than 2013 supply.

The JPM analysts however do not share OPEC’s optimistic outlook for the price of oil. Its 2015 Brent price forecast was reduced by $33 to $82 per barrel; while 2016 Brent price forecast was reduced by $32.2 to $87.80 per barrel.

Yinka Abraham