Oil price forecasts get more bullish as oversupply concerns ease

Analysts are again raising oil-price predictions, in a reflection of falling concerns over the glut in crude supply.

Analysts are again raising their oil-price forecasts, in a reflection of falling concerns over the glut in crude supply.

That helps relieve the pressure on members of the Organization of the Petroleum Exporting Countries — who are set to meet tomorrow — following months of fervent debate over production levels within the cartel.

Investment banks surveyed by The Wall Street Journal raised their price forecast for the third consecutive month in May, predicting that Brent crude, the international benchmark, would average $US43 a barrel in 2016. That is up $US2 from April’s survey.

The survey of 13 investment banks predicts that the price of West Texas Intermediate, the US oil gauge, will average $US41 a barrel this year and $US55 a barrel in 2017.

“The market is conspiring to help OPEC,” said Doug King, chief investment officer at RCMA Asset Management and manager of that firm’s $US240 million Merchant Commodity hedge fund. “If I was in the Saudis’ shoes right now, I’d be pretty happy right now.”

Oil prices rose above $US50 a barrel last Thursday for the first time since November.

Late yesterday in New York, Brent crude was trading up 21 cents, or 0.2 per cent, at $US50.57 a barrel. West Texas Intermediate was up 50 cents, or 1 per cent, to $US49.83. Brent is up close to 80 per cent from its lows earlier this year.

Almost six months of lower prices has dragged the year’s average down. But analysts see a more-positive trajectory for the second half of the year. By the fourth quarter of 2016, analysts expect oil to be trading at $US48 a barrel, up from a prediction of $US47 in April’s survey.

Analysts cut their forecasts throughout the start of this year amid a glut of oil and concern over the Chinese economy, the world’s second-biggest consumer of oil.

But crude has rallied since it hit a decade low of less than $US30 early this year as US output continued to decline and a series of production outages from Canada to Nigeria took barrels off the market.

US output has fallen from a peak of 9.7 million barrels a day in April 2015 to less than nine million barrels in recent weeks, according to government data.

The rally is welcome news for OPEC, many of whose members have struggled to shore up their resource-dependent budgets during the nearly two-year old-price rout.

Few analysts expect OPEC to change its policy at this week’s meeting in Vienna. “The urgency to do something is gone as prices have rallied,” said Michael Wittner, chief oil analyst at Société Générale SA.

In late 2014, the group established a policy of pumping flat out in a bid to defend its market share against increased competition from the US and others.

The path to consistent prices gains is expected to be volatile. The banks in the survey see Brent averaging $US43 a barrel in the third quarter of this year, below where it is trading now.

Analysts say that supply disruptions, such as through civil unrest in Nigeria, will ease, sending more crude washing back into markets. Production from some OPEC members is also on the rise, including from Iran, which is ramping up its output after international sanctions were lifted in January.

OPEC could face another familiar challenge: US shale drillers. US oilfields are peppered with drilled wells that haven’t been activated and a $US50 barrel is enough to now make them profitable, according to Citigroup. The recent price rally could release 400,000 barrels a day or more of new US output, the bank said.

“If oil stays above $US50 a barrel, US producers waiting on the sidelines could increase their output,” said Mark Watkins, regional investment manager at the US Bank Wealth Management, which oversees $US128 billion in assets. “That’s why rising prices are a mixed bag for OPEC.”

Wall Street Journal