Oil prices are surging after Goldman Sachs joined the bandwagon of forecasters predicting oil’s chronic issue of oversupply is finally being resolved.
The influential Wall Street bank has been stubbornly bearish on oil for the past few months even as rivals Citigroup Inc,, Barclays Plc, Bank of America Merrill Lynch and RBC Capital Markets have been predicting a recovery in the past few months.
“The physical rebalancing of the oil market has finally started,” Goldman said. The bank upgraded its U.S. crude price forecast for the second half of 2016 to US$50 a barrel from US$45 forecast in March.
U.S. crude benchmark Western Texas Intermediate for June shot up US$1.44, or 3.1 per cent, to US$47.65 a barrel on the New York Mercantile Exchange, its highest level since November 4. Oil has now climbed more than 75 per cent from its year’s low of US$26 in mid-February.
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Goldman and other forecasters say outages in Canada, Nigeria and declining production in the U.S., Venezuela and Libya are key factors draining excess supply from markets in recent weeks, leading to a balance that has eluded markets for the past 18 months and depressed prices.
In its latest market outlook, the International Energy Agency also expects global surplus of oil to “shrink dramatically later this year.”
But oil’s rally could be halted by developments in two of the world’s largest crude oil producers.
“Oil prices have been boosted by supply outages which should prove temporary, while further gains are likely to be capped by the possibility of a rebound in U.S. shale output and higher Saudi Arabian production,” said Capital Economics in a note to clients on Friday.
“We suspect that the recent rally in oil prices may have gone too far… Production in Canada is likely to be fully restored by next month, bringing more than one million bpd of supply back to the market.”
The London-based research house believes there’s “growing risk” that the recent surge in prices will prompt U.S. shale firms to resume drilling again, while there is also the potential for OPEC members, especially Saudi Arabia, to increase supply in response to higher prices.
“To be clear, we still expect prices to rise over the medium term (our end-2017 forecasts are US$60 per barrel for both Brent and WTI). But this will require larger falls in supply and increases in demand than we have seen so far,” Capital Economics said.
We suspect that the recent rally in oil prices may have gone too far
While Bank of America Merrill Lynch is predicting Brent crude benchmark to reach US$61 per barrel by 2017, “an increase in Saudi supplies could spoil our view.”
Saudi Arabia is pursuing a muscular foreign policy and may raise crude oil production to take market share away from key rivals Iran and Russia. It’s new Saudi Vision 2030 plan envisions a strong, diversified economy that directly compete with regional rivals for foreign investment in major sectors such as energy.
Risk management consultancy Eurasia Group believes Saudi Arabia’s hawkish anti-Iran policy will impact the global oil and gas sector, especially as the appointment of veteran Khalid Al-Falih as the country’s new oil minister is designed to facilitate both Saudi Aramco’s privatization plans and Saudi-Iranian energy competition.
“Given these dynamics, competition between Iran and Saudi Arabia for crude oil market share in Asia will intensify,” Ayham Kamel, director, Middle East & North Africa at Eurasia Group, said in a note to clients.
Citibank also expects Saudi Arabia to raise its production to 11 million bpd “in the near future” from its current level of around 10.21 million bpd, in a bid to expand its market share.
Given the short-term headwinds on the horizon and rising speculative trade in crude oil markets, Bank of America is recommending selling WTI in the interim and is expecting prices to languish at US$39 by the third quarter, before hitting US$54 by the end of the year.
“We recently recommended and reiterate selling crude oil at US$45.75 into event driven stress with a stop at US$48.25. Three downside targets include US$40, US$38.50 and possibly US$35.25,” BofAML analysts led by Franciso Blanch said in a note to clients Friday. “Our underlying analysis includes bearish divergences between price, aggregate volume and aggregate open interest.”
Finally, mothballed North American rigs could be fired up once again as prices perk up and the inventory of drilled but uncompleted shale wells declines.
“Other producers have suggested that if oil prices hover around US$50 per barrel for some months, they would look to increase activity to spur new growth,” notes the IEA. But the energy watchdog insists constrained capital spending budgets will likely cap any significant ramp-up in the rig count.