 "Abhishek Deshpande, Chief Oil Analyst, Natixis commodities research")
Abhishek Deshpande, chief oil analyst at Natixis, the multinational corporate and investment bank, says a further slide in crude oil price is in sight. Edited excerpts of a talk with Rajesh Bhayani on the implications:
How low could crude oil prices go and by when?
With continuing weakness for its demand from key
drivers, including China and America, the US Fed's rates increases leading to further appreciation in the dollar, Saudi Aramco’s potential public offer of equity confirming their intent to raise money to reduce their budget deficit and brace for low prices for longer than they were expecting, we are taking a more bearish view than before. And, expect oil prices could fall much below $30 a barrel, even touching $20/bbl in the first quarter (Q1) of 2016-17.
We expect the prices to remain range-bound and capped in the near term. Brent should average $39.5/bbl in 2016, with the possibility of dipping much below $30/bbl and WTI below $20/bbl in Q1 of 2016. We expect US light crude to average $37.3/bbl in 2016, with the Brent WTI spread trading at $1-2/bbl, thanks to the lifting of the US ban on crude exports.
Speculators are also so much bearish.
Managed money net long positions for WTI were down by 23.8 mn bbl for both futures and options. This is more to do with increased short positions by investors as they turn bearish on US light crude, on increasing stockpiles. Managed money net long positions for Brent surprisingly increased by 21.4 mn bbl, perhaps as investors took a more bullish view, thanks to the Saudi Arabia-Iran conflict. We think investors will increase their short positions further, with a limited upside on prices expected in the coming weeks, which will put further pressure.
Is the macro economic scene so bad for crude oil demand? Why else should it fall?
Weakness in the global economy is predominantly led by China, where the key indicators are showing a slowdown in growth, if not a hard landing as many are predicting. Fear of currency devaluation is further spooking the markets, of China’s inability to control the existing crisis. Risks from emerging markets are still high. We have also seen some weak numbers out of the US, especially in manufacturing and also in oil demand.
Overall, global oil demand is expected to grow only at around a million barrels a day, year on year (yoy), as opposed to the exceptional 1.8 mn b/d in 2015. Also, efficiency gains and energy basket diversification will play a big role in curbing demand for fossil fuels earlier than expected.
The price now is much below output cost in most producing countries. Which are the worst affected and how will that impact the global market place?
Low oil prices are likely to hurt high-cost producers, such as Canadian oil sands and ultra-deep offshore oil production, and some of the expensive shale basins as well. However, in most parts of the world, production will only stop if we run out of storage capacity and perhaps if oil drops below the cash cost of production for a sustained period. As some of these are sunk costs, with some hedged, producers will probably continue to produce for slightly longer, hoping someone else will fold before they do, before they shut wells.
Also, the weaker Opec (the cartel of exporting countries) countries are under immense pressure with sustained low prices. This could lead to increased social unrest in parts of the world that are anyway not so stable, disrupting supplies.
Do you see storage demand for oil from consuming countries improving from the current price level?
Net oil importing countries such as India and China will make most of the low price scenario to step this up, both for processing and building their strategic petroleum reserve (SPR). Movement of VLCCs (very large oil carrier vessels) to India and China are likely to remain at record levels due to high refinery processing rates in Asia. This will slow down once refineries go into seasonal maintenance in the coming months and as margins come under pressure due to surplus oil products.
Both India and China are likely to expedite plans to fill their SPR caverns at these low levels. How fast they can build storage facilities will dictate how much crude they can physically import. We will, nevertheless, see a lot of crude going to the US for onshore storage, as there are storage facilities available. Once those get filled, we will see oil moving on to floating storage. This is likely to push term charter rates up as ship owners will make the most out of this stranded surplus oil, leading to a situation of super contango (a state in which the forward price of a commodity is higher than the spot to a greater extent than can be explained by the interest and storage costs), as observed in 2008-09.
If prices are to stay low, do you see the end of the shale oil era as envisaged by Opec? What could be the next move from producers, including Opec?
We are predicting close to a 500,000-800,000 b/d drop in US oil production yoy in 2016. But, this is due to reduced investments by US oil firms. Not many of them have gone bankrupt. It will take possibly another year before which this will happen but with their Chapter 11 bankruptcy law, they that they can return to operations after restructuring. So, it won’t kill US shale industry but only paralyse it, if at all, for some time. As soon as oil prices rise due to reduced investments in the rest of the world, US producers will again return to the markets, with increased investment and production.
