The Wall Street Journal has conducted a survey in April 2016 to get an overview of the oil prices direction in the next few quarters as seen by 13 investment banks. And despite the current rally in oil prices, the survey shows that analysts are doubting the rally and apparently many of them are still in the pessimism state.
According to the survey, investment banks' forecasts for oil prices have not changed much from a similar survey conducted by The Wall Street Journal in March 2016. The survey shows that the banks see Brent crude and West Texas Intermediate averaging $41 and $39 a barrel this year respectively. That represents a change of only $1 up from March's survey for Brent crude and no-change from March's survey for West Texas Intermediate.
While few investment banks' forecasts fall in a range close to the current direction of the oil prices, a notable forecast that points to a different direction is coming Morgan Stanley. The reputable investment bank along with other investment banks such as ING and BNP see oil prices falling in the third quarter of 2016. Although the analysts at Morgan Stanley have predicted the fall of oil prices to $20s earlier this year, they are now wrong in their forecast and here is why.
1- Morgan Stanley's forecast ignores the change in fundamentals
Some analysts including those at Morgan Stanley believe that the current rally in oil prices could mimic last year’s when Brent crude increased about $20 a barrel between January and May before falling later in the year. They are also worried about the current U.S. stockpiles and the potential for increased oil output from Iran. Although these threats are real, the analysts seems to be ignoring the fact that circumstances have changed.
Last year when oil prices jumped about $20 a barrel between January and May, the oil market downturn was just at its beginning. According to the EIA, the global oil over-supply (supply minus demand) was growing at that time where it increased from about 2 million barrel per day in January 2015 to about 2.3 million barrel per day in May 2015 before reaching its highest level at 2.51 million barrel in August 2015. Crude oil supply was increasing dramatically while demand was lagging.
U.S. crude oil production was also growing during that time where it increased from about 9.15 million barrel a day in January to about 9.4 million barrel a day in May before hitting its highest level at 9.6 million barrel a day in July 2015. It is obvious that during the January-to-May 2015 rally, all sentiments were pointing toward a further fall in oil prices and that is exactly what happened from May 2015 onward.
But this year, things are totally different than they were in 2015, from fundamentals to oil market cycle emotions. First of all, unlike the January-to-May 2015 rally, U.S. crude oil output is dwindling at an accelerating decline rate. The U.S. crude oil production has fallen from 9.2 million barrel a day in January 2016 to 8.9 million barrel a day in April 2016. U.S. rig count is also experiencing a sharp and continuous decline since the beginning of 2016. According to Baker Hughes, U.S. Rig Count is down 485 rigs from last year at 905, and the decline in rig count is still intensifying.
In addition to that, the global over-supply is easing with supply decreasing and demand increasing. According to IEA's Oil Market Report, global oil supplies fell from about 97.2 million barrel a day in the 4th quarter of 2015 to about 96.2 million barrel per day in the 1st quarter of 2016. Demand has also improved since last year where the global demand increased from 93.6 million barrel a day in the 1st quarter of 2015 to about 94.8 million barrel a day in the 1st quarter of 2016.
Currently, the oil market fundamentals are totally different from those during the January-to-May 2015 rally, yet analysts chose to ignore these changes and focus on events such as the increase of Iran's oil output which time has proven it has little to no effect on the oil market.
2- Morgan Stanley's forecast is not consistent with the market cycle emotions
Back in January 2016, when analysts at Morgan Stanley and other investment banks predicted oil prices to fall to $20 a barrel, they did it at the right time. Eventhough oil prices didn't fall to the level they have predicted, it fell below $30 a barrel. At that time, the oil market was at its worst state, pessimism was ruling everything. And when the analysts predicted prices to fall to $20 a barrel and below, what they did was fueling the pessimism and pressuring oil prices to fall. Unfortunately, they succeeded in dragging oil prices down only because they played with the right emotion in the right direction at the right time.
But that is not the case now with their current pessimistic forecast. They are playing with the wrong emotion in the wrong direction at the wrong time. Right now, the oil market cycle emotion is optimism and events that have taken place in the oil market during the last few weeks support this fact. For instance, despite the failure of Doha's meeting, and the fact that Iran is ramping up its oil output, oil prices were able to sustain their gains and continued increasing. In fact, just a few days after the failure of Doha's meeting, oil prices continued their gains, breaking out of a trading band. This shows the high level of optimism the oil market is in right now which some analysts underestimate its ability to drive prices up.
It should be clear by now that the direction of the oil market at this moment is different from that predicted by Morgan Stanley's analysts and other investment banks which suggest that oil prices would fall again in the coming months. Judging by the improvement in oil market fundamentals and the current high level of optimism in the market, oil prices will continue its rally and it could reach to $50 a barrel in the coming weeks.
It is expected that oil prices will remain in a range between $40 to $60 per barrel till the end of 2016. Oil traders at this moment are very optimistic and they are looking for a hope in anything whether it is the weakening U.S. dollar or the declining U.S. crude oil output and rig count. Hope and optimism is required to get the market out of this period and sustain oil prices at the current level or a little bit higher till market fundamentals improvement intensifies. Once the oil market fundamentals play its role completely, it will take charge of balancing the market and driving oil prices.
April 30, 2016 I By Alahdal A. Hussein
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Working natural gas inventories in the Lower 48 states totaled 3,519 billion cubic feet (Bcf) for the week ending October 11, 2019, according to the U.S. Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report (WNGSR). This is the first week that Lower 48 states’ working gas inventories have exceeded the previous five-year average since September 22, 2017. Weekly injections in three of the past four weeks each surpassed 100 Bcf, or about 27% more than typical injections for that time of year.
Working natural gas capacity at underground storage facilities helps market participants balance the supply and consumption of natural gas. Inventories in each of the five regions are based on varying commercial, risk management, and reliability goals.
When determining whether natural gas inventories are relatively high or low, EIA uses the average inventories for that same week in each of the previous five years. Relatively low inventories heading into winter months can put upward pressure on natural gas prices. Conversely, relatively high inventories can put downward pressure on natural gas prices.
This week’s inventory level ends a 106-week streak of lower-than-normal natural gas inventories. Natural gas inventories in the Lower 48 states entered the winter of 2017–18 lower than the previous average. Episodes of relatively cold temperatures in the winter of 2017–18—including a bomb cyclone—resulted in record withdrawals from storage, increasing the deficit to the five-year average.
In the subsequent refill season (typically April through October), sustained warmer-than-normal temperatures increased electricity demand for natural gas. Increased demand slowed natural gas storage injection activity through the summer and fall of 2018. By November 30, 2018, the deficit to the five-year average had grown to 725 Bcf. Inventories in that week were 20% lower than the previous five-year average for that time of year. Throughout the 2019 refill season, record levels of U.S. natural gas production led to relatively high injections of natural gas into storage and reduced the deficit to the previous five-year average.
The deficit was also decreased as last year’s low inventory levels are rolled into the previous five-year average. For this week in 2019, the preceding five-year average is about 124 Bcf lower than it was for the same week last year. Consequently, the gap has closed in part based on a lower five-year average.
Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report
The level of working natural gas inventories relative to the previous five-year average tends to be inversely correlated with natural gas prices. Front-month futures prices at the Henry Hub, the main price benchmark for natural gas in the United States, were as low as $1.67 per million British thermal units (MMBtu) in early 2016. At about that same time, natural gas inventories were 874 Bcf more than the previous five-year average.
By the winter of 2018–19, natural gas front-month futures prices reached their highest level in several years. Natural gas inventories fell to 725 Bcf less than the previous five-year average on November 30, 2018. In recent weeks, increasing the Lower 48 states’ natural gas storage levels have contributed to lower natural gas futures prices.
Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report and front-month futures prices from New York Mercantile Exchange (NYMEX)
Headline crude prices for the week beginning 14 October 2019 – Brent: US$59/b; WTI: US$53/b
Headlines of the week
Amid ongoing political unrest, Ecuador has chosen to withdraw from OPEC in January 2020. Citing a need to boost oil revenues by being ‘honest about its ability to endure further cuts’, Ecuador is prioritising crude production and welcoming new oil investment (free from production constraints) as President Lenin Moreno pursues more market-friendly economic policies. But his decisions have caused unrest; the removal of fuel subsidies – which effectively double domestic fuel prices – have triggered an ongoing widespread protests after 40 years of low prices. To balance its fiscal books, Ecuador’s priorities have changed.
The departure is symbolic. Ecuador’s production amounts to some 540,000 b/d of crude oil. It has historically exceeded its allocated quota within the wider OPEC supply deal, but given its smaller volumes, does not have a major impact on OPEC’s total output. The divorce is also not acrimonious, with Ecuador promising to continue supporting OPEC’s efforts to stabilise the oil market where it can.
This isn’t the first time, or the last time, that a country will quit OPEC. Ecuador itself has already done so once, withdrawing in December 1992. Back then, Quito cited fiscal problems, balking at the high membership fee – US$2 million per year – and that it needed to prioritise increasing production over output discipline. Ecuador rejoined in October 2007. Similar circumstances over supply constraints also prompted Gabon to withdraw in January 1995, returning only in July 2016. The likelihood of Ecuador returning is high, given this history, but there are also two OPEC members that have departed seemingly permanently.
The first is Indonesia, which exited OPEC in 2008 after 46 years of membership. Chronic mismanagement of its upstream resources had led Indonesia to become a net importer of crude oil since the early 2000s and therefore unable to meet its production quota. Indonesia did rejoin OPEC briefly in January 2016 after managing to (slightly) improve its crude balance, but was forced to withdraw once again in December 2016 when OPEC began requesting more comprehensive production cuts to stabilise prices. But while Indonesia may return, Qatar is likely gone permanently. Officially, Qatar exited OPEC in January 2019 after 48 years of continuous membership to focus on natural gas production, which dwarfs its crude output. Unofficially, geopolitical tensions between Qatar and Saudi Arabia – which has resulted in an ongoing blockade and boycott – contributed to the split.
The exit of Ecuador will not make much material difference to OPEC’s current goal of controlling supply to stabilise prices. With Saudi production back at full capacity – and showing the willingness to turn its taps on or off to control the market – gains in Ecuador’s crude production can be offset elsewhere. What matters is optics. The exit leaves the impression that OPEC’s power is weakening, limiting its ability to influence the market by controlling supply. There are also ongoing tensions brewing within OPEC, specifically between Iran and Saudi Arabia. The continued implosion of the Venezuelan economy is also an issue. OPEC will survive the exit of Ecuador; but if Iran or Venezuela choose to go, then it will face a full-blown existential crisis.
Current OPEC membership: