60b oil probably within range in medium term: QNB

(MENAFN- The Peninsula)

DOHA: Oil prices have enjoyed a recovery in recent weeks. They rose from $28 per barrel (/b) in mid-January to around $40/b now. While a potential production freeze by some oil producers might have contributed to the recovery there are also signs that the market is rebalancing QNB’s ‘economic commentary’ noted yesterday.

“Demand growth is proving resilient and high-cost US producers are cutting their output. We expect the rebalancing to continue and forecast oil prices to recover further averaging $41 in 2016 $51 in 2017 and $56 in 2018” QNB analysts wrote.

According to estimates from the International Energy Agency (IEA) oil markets were over-supplied by around 1.8m barrels per day (b/d) in 2015. Four questions are likely to determine how this excess supply will be cleared and therefore shape oil markets in the short term.

First will the strong demand growth (which reached 1.8m b/d in 2015—a five-year high) persist? Second how will the high-cost US shale producers respond to low prices which are making some of their projects unviable?

Third what production will Iran add after the lifting of sanctions? Fourth how will the rest of Opec respond to low prices? We look at how the answers to these questions are likely to evolve in 2016-17.

In 2016 QNB expects excess supply to fall to 1.2m b/d from 1.8m b/d in 2015. Part of this contraction will be due to higher demand which we expect to grow by 1.2m b/d. Emerging markets are likely to remain the main source of demand growth given the booming consumer sector especially in China and the rest of emerging Asia. On the supply side we expect production cuts in the US. Indeed production data show that US oil output has been in decline since April 2015. Offsetting this QNB forecasts additional production from Iran after the lifting of sanction.

Iran has already added 370k b/d since January according to preliminary data from the IEA. The rest of Opec is expected to increase supply relative to last year as crude production is maintained at current high levels. The overall reduction in excess supply should result in oil prices averaging $41/b in 2016.

In 2017 excess supply should fall further to 0.4m b/d as the market continues rebalancing. Demand growth is expected to continue at 1.2m b/d. On the supply-side additional production from OPEC especially Iran and Iraq is expected to be partially offset by lower US production. The continued rebalancing should push prices to an average of $51/b.

In the medium term oil prices should be determined by the cost of the marginal producer in this case US shale companies. Oil analysts currently estimate this cost to be $60/b. QNB therefore expects a gradual convergence of oil prices to this level leading to an average oil price of $56/b in 2018.

To sum up oil markets are not different from other markets. When over-supplied they have a tendency to self-adjust through higher demand and lower supply. This adjustment is currently underway as recent data confirm. In the medium term the price is determined by the costs of US shale companies. If prices rise above shale companies’ cost they can quickly respond by increasing their production driving prices down again. This means that oil prices of $100/b may well be a thing of the past but a price of $60/b is probably within range in the medium term.The Peninsula