This week we had three good reports on the long-term outlook for oil prices.
EIA Issues New Market Outlook
On Tuesday, the EIA issued its Monthly report. Important notes include the following:
- The EIA forecast an average price for WTI of $43.57 a barrel this year, up from the previous forecast of $42.83 per barrel.
- For 2017, the EIA sees an average price of $52.15 per barrel for both WTI and Brent.
- The EIA left U.S. Oil production estimated production at 8.6 million barrels per day for 2016, falling to 8.19 million bpd for 2017.
- The EIA did estimate that demand growth this year would be 1.44 million barrels per day (down 10,000 bpd from the prior forecast).
- However, at the same time, global demand growth for 2017 is now projected at 1.49 million bpd, up 20,000 bpd from the prior forecast.
OPEC Issues New Global Forecast
On July 12, 2016, OPEC gave a positive outlook for oil markets in 2017 (https://www.yahoo.com/finance/news/opec-says-brexit-weigh-global-112052738.html). OPEC believes that global demand for crude will be higher than current production and a supply deficit will exist rather than the current sizeable surplus.
However, citing Britain’s exit from the European Union, OPEC did cut its forecast for world economic growth this year and further stated that the pace of oil demand growth would slow slightly next year. According to OPEC, world oil demand will rise by 1.15 million barrels per day next year (this is the first forecast for next year in a monthly report). That marks a slight slow down of the 1.19 million bpd growth expected in 2016. OPEC further forecasts supply from non-OPEC producers will fall 110,000 bpd in 2017.
OPEC believes that despite the current surplus supply of about 1 million bpd this year, demand for its crude will exceed current production by third quarter of this year. This is excellent news and markets reacted favorably shortly after the report.
Citibank is Bullish On Oil
In a research note published on July 11, 2016, Citi analysts presented their claim that the oil price overshot to the downside and is setting up for a bullish end of the decade. (http://oilprice.com/Energy/Oil-Prices/Citibank-Were-Nearing-A-Bull-Market-For-Oil.html). Noting that prices crashed on oversupply, Citi believes that with oil production going offline, particularly in the U.S., markets might over-correct (i.e. too much production going offline), creating conditions for higher prices next year. They believe demand will continue to soak up excessive supply.
While investors may be skittish because of previous rallies, Citi notes this time is different. “Unlike last year, when commodity markets rallied through the second quarter, only to fall sharply come the third [quarter] as oversupply persisted, this rally looks sustainable as physical markets have tightened considerably…Global demand continues to grow at a moderate rate while the pullback in capital spending is reducing not just supply growth but total supplies across nearly all extractive industries.” Citibank believes prices will likely rise in the coming months, with a more sustained rally next year.
Barclays Has to Be Contrarian.
However, Barclays isn’t so sure and gave us some contrary indications. In an interview with CNBC, Michael Cohen, head of energy commodities research at Barclays said he is bearish on oil over the next six to eight months because current stockpiles could increase in an economic downturn, likely to drive prices lower. Cohen believes the current disconnect between expected crude oil supply compared to current amount is staggering. Cohen also believes that because of the huge supply overhang, fragile global growth, and Chinese overproduction all lead to huge excess inventory that will hamper any recovery and could drive prices lower.
Want to know what Ty thinks? Read Ty’s Take for this week.
By: Ty Chapman
Five Star Metals, Inc.
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