$60 by YE 2016?
“Rigzone” reports that an article in “Barron’s” references the prediction of $60 oil by the end of this year. An initial reaction to this this forecast might be, “Why even take this seriously?” An almost 35% increase within less than 6 months is pretty incredible. Well, there are at least two reasons.
First, the forecast was made by Eric Lee with Citigroup. Lee, it should be remembered, predicted the oil price crash of 2014, when oil was at $100. Consequently, he might be right when he has now turned into a short-term bull.
Secondly, Lee’s analysis is based on fundamentals, not rumors, “OPEC Optimism Premiums”, or other speculation. Admittedly, his estimates of fundamental price drivers might be contrarian, but they are still related to fundamentals.
Basically, Lee sees accelerating demand concurrent with reduced supply from OPEC reducing inventories and driving prices higher. In 2016 global demand was 96 million barrels of oil per day (bopd). Lee anticipates this rising to a record high of 97.3 million bopd in 2017, primarily due to growth in emerging markets such as China and India. Concurrently, he projects OPEC supplies in 2017 to be about 700,000 bopd less than last year. The combination of these trends resulted in global inventories starting to drop after the first quarter of this year. Lee sees this trend accelerating through the end of 2017.
This might seem unlikely given that both domestic, and OPEC, production is currently increasing. However, Matt Smith, with Clipperdata, notes that in June domestic exports were 2 million bopd higher than for the same month last year, in spite of OPEC cutbacks of 1.8 million. Lee also points out that most analysts overlook the importance of the timing of OPEC production quotas. OPEC made the cuts effective at the end of calendar year 2016, not when announced. This enabled cartel members to ramp up production during negotiations, which in turn meant that when the cuts went into effect they were coming off a higher base.
Lee thinks that $60 will become a ceiling and that prices will stay flat into 2018 with domestic production acting as a counterbalance.
To read the article in its entirety, please go to http://www.rigzone.com/news/oil_gas/a/150944/Oil_Could_Hit_60_Before_YearEnd?utm_source=DailyNewsletter&utm_medium=email&utm_term=2017-07-10&utm_content=&utm_campaign=industry_headlines_1 .
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