Analysts downgrade crude oil further

Expect oil to break $40 level, as improving shale gas efficiency to prolong war for market share

Crude oil prices have further declined in the past two months following renewed projections of lower demand and rising production.

Prices have almost corrected 30 per cent in the past two months. WTI crude oil is trading at its lowest level since March 2009, while Brent crude might hit fresh six-and-half-year lows, as analysts have started downgrading oil prices further. WTI crude is trading at a little below $42 for the last few days, a level last seen in March 2009.  

Christopher Wood, managing director and chief strategist of CLSA, said, “A break below $40 in the oil price is only a matter of time even if there is undoubtedly scope for a short-term bounce. This is because shale production is becoming ever more efficient, which is why the marginal cost of production keeps falling.”

Wood said with US shale gas efficiency improving, it cannot be assumed that Saudi Arabia will ultimately win the battle for market share.  

"This also explains why a falling North American rig count has so far coincided with rising US oil production. Thus, the US oil rig count has declined by 58 per cent since peaking in October 2014, while the US crude oil production has risen by 6 per cent over the same period,” he said.

Going by this, it is certain that Brent oil will also fall in line with WTI oil. Oil prices have fallen from their peak of over $100 in June 2014 due to competition between US shale gas producers and West Asian countries. Lower global growth along with rising production of crude oil has added to the woes.

A few days ago, Saudi Arabia said it was scaling down its oil production from record levels last month even as rival Organization of the Petroleum Exporting Countries (Opec) members helped push the group’s output to the highest level since 2012. Iraq and other members of Opec are expected to continue producing more oil.  

Analysts say the increase above 10 million barrels per day in recent months had been partly driven by a seasonal need to meet higher summer power demand and to build up stocks at new refineries in the country. Opec output — led by Saudi Arabia and Iraq — has risen this summer, adding to a global glut. Supply from US shale and other countries outside of Opec was proving to be more resilient than initially expected, the cartel said on Tuesday.

Wood said the real action remains in the oil-led commodity market, where the Bloomberg Commodity Index is now at its lowest level since February 2002.

Natixis, another leading London-based commodity research house, has also downgraded oil further.

Abhishek Deshpande, lead oil markets analyst, Natixis Commodities, believes the recent fall in oil prices was led by Chinese data of lower growth and removal of sanctions on Iran along with glut in oil.

“Given the continued weakness in commodities markets and oil in particular due to a glut in global oil and oil products supply along with some weakness in China and expected strength in dollar, we have revised our oil price forecasts once again. As forward curve has already corrected itself to our last forecasts, we have reduced our oil price scenario down further in 2015 and 2016 for Brent to reflect our continued bearish view on oil,” he said.

For WTI, Natixis scaled down the average price for 2015 to $47.8. The average so far this year has been $52.39. Similarly, for 2016, its forecasts are for WTI average of $41 and for Brent average of $45.