Some high-profile oil market forecasters are starting to break from the bearish pack that has prevailed for more than a year.
The International Energy Agency (IEA) is not one of them, however, with its gloomy monthly market prognosis yesterday concluding that “the surplus of supply over demand in the early part of 2016 is even greater than we said in last month’s” report.
Others, including Bank of America Merrill Lynch (BoAML) and Deutsche Bank, are seeing the market probably bottoming out.
But the IEA – energy watchdog for the big consuming countries – is not convinced by the price recovery, which has lifted benchmark North Sea Brent from a 13-year low in mid-January of US$27.10 per barrel to above $33 per barrel this week, calling it a “false dawn”.
“Perhaps some of the more fevered forecasts of oil prices falling to as low as $10 per barrel are extreme and better days do lie ahead for oil prices,” the IEA said. “However, before victory over the bearish forces is declared we should look at the main factors driving this optimism.”
It dismissed the speculation that Opec and some non-members – especially Russia – might coordinate output cuts. The Venezuelan oil minister visited Moscow last week as part of what many industry observers considered to be a desperate and futile mission.
But the IEA said “the likelihood of coordinated cuts is very low”.
The agency also took a downbeat stance on other variables for the market. On demand, it expects global growth to slow to 1.2 per cent this year from 1.6 per cent last year.
It also expects supply to fall only slowly, with the US shale slowdown not as rapid as anticipated, and with the major Opec producers – Saudi Arabia, Iran and Iraq – still aiming to pump full out.
Given its assumptions, the IEA says the rise in oil inventories will continue into the second half of the year, “and with the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term”.
The more bullish case maintains that oil prices at current levels will lead to a shortage just over the horizon.
Francisco Blanche, the head of commodities research at BoAML, points out that energy consumption as a percentage of the global economy is at its lowest for nearly 20 years.
“So cheap oil will likely encourage strong demand growth ahead … as consumers no longer rush to buy smaller and more fuel-efficient cars and consumption speeds up in Asia,” he said.
If oil prices stay as low as they are at present, then the world oil market would end up 4.8 million barrels per day short of supply by 2020 because of the huge amount of investment in new exploration and development that has already been cancelled, he said.
BoAML thus expects oil prices will recover to average of somewhere between $55 and $75 per barrel over the next five years, which would mean a recovery soon.
Deutsche Bank likewise is expecting a recovery, predicting $50 per barrel for oil by the end of the year after a weak first half and an average of $40 for the whole year.
The German bank’s chief investment officer, Stefan Kreuzkamp, agreed that prolonged low oil prices now would soon lead to an “oil price shock” as supply failed to keep pace with demand when economic growth ticks up.
One of the factors keeping the oil market oversupplied, Mr Kreuzkamp acknowledged, is the surprising resilience of the US shale producers.
A new report by Wood Mackenzie points out, in fact, that worldwide only 0.1 per cent of oil production – about 100,000 bpd – has been shut in because of low oil prices, even though it estimates that 3.4 million bpd is “cash negative” at $35 per barrel, including 2.2 million bpd in Canada and a 190,000 bpd in the US.
Budget cuts “have slowed investment, which will reduce future volumes, but there is little evidence of production shut-ins for economic reasons”, said Robert Plummer, a researcher at WoodMac.
The point of agreement for oil market analysts, including the IEA, is that there is a point at which demand will catch up with supply and start to eat into bulging world inventories. But the timing of that inflection point is a moving target.
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