Oil prices to face more downside pressure

Date

2/28/2016 11:49:54 PM

(MENAFN- Khaleej Times)

The price of Brent crude fell to the lowest monthly average in a decade in January at $30.8 per barrel. Brent price averaged $52 last year and $99 in 2014. Oil supply outpaced demand in the last two years but the market is expecting a tighter market in 2016. The consensus view is that oil prices will gradually bottom out from January's low remaining below last year's level. US Energy Information Administration forecasts Brent price to average $37.4 per barrel in 2016 reaching $43 by December. Market views are roughly aligned as Brent futures contracts averaged $35 per barrel for 2016 as of last week. The market may be underestimating future supply and overestimating future demand which would result in oil prices falling below EIA's forecast for a third consecutive year.

The IMF projects a recovery in economic growth from 3.1 per cent year on year in 2015 to 3.4 per cent year on year this year. In our view global demand will most likely decelerate to around 2.8 per cent. The IMF expects US growth to rise slightly this year but recent data suggest otherwise. Investment and consumption are sluggish the industrial sector is contracting and the labor and property markets are showing early signs of a slowdown. The IMF expects the euro zone and Japan to accelerate too but these economies show no signs of strength. February's PMI figures suggest a deceleration in all three developed markets. Moreover China the world's largest oil importer will continue on its deceleration path this year due to its structural rebalancing. EIA and I expect oil demand growth to decelerate slightly from 1.5 per cent year on year in 2015 to 1.3 per cent this year. In our view these growth estimates are too high.

EIA and IEA estimate oil supply growth to fall from 2.5 per cent year on year in 2015 to 0.5 per cent and 0.3 per cent year on year respectively driven mainly by a decline in shale output. The low oil price environment has forced US and Canadian companies to cut back on investment and close down rigs. However the effect is yet to be seen on crude stockpiles which are still around all-time highs. Upside risks to supply are more evident in other markets such as Iran Iraq and Libya. Iran and Iraq are producing below their full capacity. The recent removal of sanctions on Iran and the return of Iraq's energy industry following years of devastating conflicts is driving a reemergence in their output. Russia Saudi Arabia and Venezuela who are producing near record highs are ready to cap production at current levels but the deal depends on the participation of Iran and Iraq which is unlikely to happen. Moreover sectarian tensions in the region has complicated the relationship between Saudi Arabia Iran and Iraq.

The writer is economist at Asiya Investments Company. Views expressed by the author are his own and do not reflect the newspaper's policy.

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