Crude oil Outlook: Prices could fall further

On February 15 in Doha, there was an agreement between the Organization of the Petroleum Exporting Countries (Opec) producers Saudi Arabia, Qatar and Venezuela and non-Opec producer Russia to freeze crude oil output at levels seen before January 11, 2016. These talks were followed by meetings between Iraq, Iran, Venezuela and Qatar day to discuss a collective production freeze. Just after the talks, Iran said it agreed in principle to help balance the oil market, but did not sign up to the proposal. Any production freeze based on pre-January 11 numbers was tantamount to Iran in particular not being able to bring an additional supply after the sanctions on it were lifted unless countries such as Saudi Arabia agree to production cuts, definitely not the case in the Doha talks.

Cracks clearly appeared in the days following the Doha talks. On February 23, Saudi Arabia's oil minister Al Naimi suggested the country would not cut production. He also said Saudi Arabia would continue to invest to maintain its total production capacity at 12.5 million barrels a day. Equally, Iran commented it was "ridiculous" to expect Iran to agree to any production freeze.

Indeed, freezing output at January 11 levels, which were 32.4 million barrels a day including Indonesia, (31.63 million barrels a day excluding Indonesia) could help balance the markets as early as the third quarter of this year with oil prices rallying $40 a barrel to justify the marginal barrel production. However, we don't think such a deal is in sight. As markets realise soon the probability for a deal between Opec members is very low and the only way a deal could be met is through production cuts by some members and realistically allowing countries such as Iran to increase production, probably slightly slower than initially Iran would have thought, we would once again see oil prices coming under pressure and reacting to the ever weakening fundamentals as we don't expect any production cuts being announced by Opec or non-Opec countries.

We are still expecting an excess in the market of 2.2 million barrels a day in the first quarter if CY2016 and 1.8 million barrels a day in the second quarter of CY2016, which could test on-shore storage capacities globally and push prices below $30 a barrel, possibly even closer to $20 a barrel once again towards the end of March or early April. We maintain our forecast for Brent crude to average $30 a barrel in the first quarter of CY2016 and then recovering slowly towards $34 a barrel in the second quarter of CY2016. This should help start the market balance process as we could see production shut-ins. With demand seasonally and year-on-year rising in the second quarter of CY2016, the markets should, then, start to balance together with a steep fall in non-Opec supply led by a US production decline. West Texas Intermediate (WTI) Brent spreads have widened once again due to increased pressure on WTI thanks to crude storage running almost full in Cushing. These spreads should narrow once we are past the crude injection period of the first quarter of CY2016 and part of the second quarter of CY2016 when refineries go offline for seasonal maintenance.

The author is chief oil analyst, Natixis Commodities Research