With demand growth proving resilient and high-cost US producers cutting their output, oil prices may recover further and a price of $60/barrel is “probably within range” in the medium term, according to QNB.
Oil prices have enjoyed a recovery in recent weeks.
They rose from $28 a barrel in mid-January to around $40/b now. While a potential production freeze by some oil producers might have contributed to the recovery, there are also signs that the market is rebalancing, QNB said in an economic commentary.
“We expect the rebalancing to continue and forecast oil prices to recover further, averaging $41 in 2016, $51 in 2017 and $56 in 2018,” QNB said.
According to estimates from the International Energy Agency (IEA), oil markets were over-supplied by around 1.8mn barrels per day (bpd) in 2015. Four questions are likely to determine how this excess supply will be cleared and therefore shape oil markets in the short term.
First, will the strong demand growth (which reached 1.8mn bpd in 2015—a five-year high) persist?
Second, how will the high-cost US shale producers respond to low prices, which are making some of their projects unviable?
Third, what production will Iran add after the lifting of sanctions?
Fourth, how will the rest of Opec respond to low prices?
In 2016, QNB expects excess supply to fall to 1.2mn bpd from 1.8mn bpd in 2015. Part of this contraction will be due to higher demand, which we expect to grow by 1.2mn bpd.
Emerging markets are likely to remain the main source of demand growth, given the booming consumer sector, especially in China and the rest of emerging Asia.
On the supply side, QNB expects production cuts in the US. Indeed, production data show that US oil output has been in decline since April 2015.
Offsetting this, QNB forecasts additional production from Iran after the lifting of sanction. Iran has already added 370,000 bpd since January, according to preliminary data from the IEA.
Finally, QNB expects that the rest of Opec to increase supply relative to last year as crude production is maintained at current high levels. The overall reduction in excess supply should result in oil prices averaging $41/b in 2016.
In 2017, excess supply should fall further to 0.4mn bpd as the market continues rebalancing. Demand growth is expected to continue at 1.2mn bpd.
On the supply-side, additional production from Opec, especially Iran and Iraq, is expected to be partially offset by lower US production. The continued rebalancing should push prices to an average of $51/b.
In the medium term, oil prices should be determined by the cost of the marginal producer, in this case US shale companies.
Oil analysts currently estimate this cost to be $60/b.
“We therefore expect a gradual convergence of oil prices to this level, leading to an average oil price of $56/b in 2018,” QNB said.
Oil markets, QNB noted are not different from other markets.
When over-supplied, they have a tendency to self-adjust through higher demand and lower supply. This adjustment is currently underway, as recent data confirm. In the medium term, the price is determined by the costs of US shale companies.
If prices rise above shale companies’ cost, they can quickly respond by increasing their production, driving prices down again.
“This means that oil prices of $100/b may well be a thing of the past, but a price of $60/b is probably within range in the medium term,” QNB said.
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