The oil market faces a bumpy ride on its way to recovery later this year.
While the failure of talks between producers to freeze output is bearish for crude, an oil-worker strike in Kuwait that’s cut its output may support the market, Goldman Sachs Group and Barclays said in separate notes, warning of increased volatility. Citigroup Inc also predicted swings even as it said prices are too low to sustain supply at levels required to compensate for declines from older fields and to accommodate demand growth.
Crude plunged more than 6.8% in early trade yesterday after the producer meeting in Doha over the weekend ended with no final accord. Talks stumbled after Saudi Arabia and other Gulf nations wouldn’t agree to any deal unless all Opec members joined including Iran, which wasn’t present at the gathering.
Meanwhile, Kuwait’s output has tumbled by 60% amid an open-ended labour strike. Prices had jumped more than 30% since mid-February when a preliminary plan to freeze production was announced.
“This crisis of confidence among oil producers to act, combined with elevated speculative length in the oil markets going into this Doha meeting, could result in a sharp price fall in the short term,” Barclays analysts including Miswin Mahesh wrote in a report dated April 17. However, “physical oil market balances have tightened recently, helped by unplanned supply outages and a slowdown in non-Opec supply growth. Over the weekend, fresh supply outages have been added, with strikes in Kuwait, further outages in Nigeria and Canada.”
While the worker strike in Kuwait may be short-lived, ongoing disruptions to output from members of the Organization of Petroleum Exporting Countries, gradually declining non-Opec production and planned maintenance have recently pointed to improving fundamentals amid resilient oil demand in the first quarter, Goldman Sachs analysts including Damien Courvalin and Jeffrey Currie said in an e-mailed report.
“The weekend headlines will further support the already high level of price volatility,” the analysts wrote in the report.
Citigroup raised its 2016 price forecast for London’s Brent crude to $43 a barrel, and for West Texas Intermediate in New York to $42 a barrel, an increase of $3 respectively from its previous estimates, according to the bank’s report.
Non-Opec output is predicted to drop by more than 1.1mn bpd in 2016, as production in nations including the US, Brazil, Mexico and China shrinks, analysts including Ed Morse wrote in the report.
WTI for May delivery lost as much as 6.8% to $37.61 a barrel on the New York Mercantile Exchange and traded at $39.23 at 10.48am London time. Brent crude on the ICE Futures Europe exchange slid as much as 7% to $40.10 a barrel.
Goldman predicts that gradually improving fundamentals will bring the market into a sustainable deficit in the third quarter of 2016.
The risk to higher oil prices in coming weeks is that while disruptions and maintenance have recently reduced global supplies, a surge in demand was seasonally driven, according to Goldman. That suggests that “once this passes, the re-balancing process and inflection phase” will take several more months, the bank’s analysts wrote in the report.
A view of Mexico’s national oil company Pemex’s refinery in Salamanca in Guanajuato state. While the worker strike in Kuwait may be short-lived, ongoing disruptions to output from Opec members, gradually declining non-Opec production and planned maintenance have recently pointed to improving fundamentals amid resilient oil demand in the first quarter, Goldman Sachs analysts have said.
