Enough demand allied with potential supply disruptions in future may help oil price rise gradually and reach nearly $100 per barrel in nominal terms by 2020, a new report has shown.
According to Samba Financial Group, Brent may average $58/b this year and $62/b in 2016.
Global oil prices have shifted downwards again; the report noted and said a pickup in the US rig count (a proxy for investment in the shale oil sector) has combined with untrammelled production growth from Saudi Arabia, Russia, Canada, Brazil and even China.
The only serious cutbacks in the pipeline are from international oil companies (IOCs) who have shelved investment plans in the challenging terrain, Samba said.
However, from 2017, the impact of IOC investment cuts should begin to bite and with a weaker dollar giving a lift to global demand, Brent is expected to average $75/b and continue to climb thereafter.
“The demand outlook is mixed, with China’s shift into less commodity-intensive sectors, such as domestic services, a major drag. That said, demand does appear to be increasing in the world’s biggest consumer, the US,” Samba said.
Combined with unconstrained supply from Opec - and the likelihood of additional Iranian output in the next 12-18 months - it is hard to see where support for significantly higher prices will come from, particularly as a large stock overhang still needs to be worked off.
Samba also said the global economy continued to expand at a moderate pace, and somewhat faster than in the first quarter of this year. The US has shrugged off the impact of a weather-related slowdown and is now growing at just under trend pace.
The eurozone has seen some recent softening of activity, but this is likely related to the Greece imbroglio which, though intractable, is unlikely to be destabilising for the eurozone as a whole.
Emerging markets are in a cyclical downturn, with commodity exporters under particular pressure, although there has been some stabilisation in the positions of Brazil and Russia in recent months.
The main question mark is over the situation in China, where a very poor manufacturing reading has combined with the rout in the Shanghai stock market to give a sense of an impending hard landing.
“Our view remains that while there is a serious misallocation of capital to be worked through, the Chinese authorities have the wherewithal to contain the fallout and keep growth in the 6 to 7% range,” Samba said.
The report also said the US dollar to continue strengthening against its trading partners for the next year or so, helping to contain imported inflation in the Gulf countries, especially Saudi Arabia. This will begin to unwind in 2017, but general weakness in global commodities should keep domestic inflation contained at below 2.5%.