Quo Vadis Oil? | Russell T. Rudy Energy LLC
Unanimity is rare in the oil industry, but there seems to be a prevailing consensus. An article by Alahadl A. Hussein on “Oil Voice” cites a recent survey conducted by the “Wall Street Journal”. The survey included input from thirteen investment banks and most see the world largely as they did back in March when the Wall Street Journal previously canvased analysts. Generally, despite the recent rally in prices, pessimism prevails.
However, Morgan Stanley, which correctly predicted the price drop below $30 earlier this year, is particularly bearish and predicts falling prices in the third quarter of this year. ING and BNP share their pessimism. However, Hussein makes the case as to why he thinks they are wrong. His argument is based on market fundamentals and emotion.
Morgan Stanley feels that the recent run up in prices is just a repeat of what we saw last year, when a price recovery was quickly snuffed out by surging production. Hussein points out that in 2015 the global oil surplus was growing from 2 million barrels of oil per day (MMbopd) in January to 2.51 MMbopd in August. While the oversupply continued, demand stagnated and production surged. In January of 2015 domestic production was 9.15 MMbopd and continued to increase to 9.6 MMbopd in July. With this unholy trinity of influences, any price recovery was destined to be short-lived.
Hussein contends that things are totally different now. Crude output is falling at an accelerating rate. January, 2016 production was 9.2 MMbopd and down to 8.9 MMbopd in April. Also, the rig count has fallen by 485 rigs, down to 905, and is still dropping. Global inventories have shrunk and demand has increased.
Hussein feels that Morgan Stanley has ignored significantly changing fundamentals and focused too much on other factors such as increasing Iranian production. He also contends that the bears are discounting the impact that a positive emotional climate will have as prices begin to inch up. He cites the prevailing optimism in spite of the failed Doha meeting, and Iran’s resurgence, as proof that emotion will amplify positive fundamentals.
The author foresees oil reaching $50 a barrel in the coming weeks and trading in a band between $40 and $60 for the rest of this year. He concludes, “Hope and optimism is required to get the market out of this period and sustain oil prices at the current level or a little bit higher till market fundamentals improvement intensifies. Once the oil market fundamentals play its role completely, it will take charge of balancing the market and driving oil prices.”
While I hope Hussein is correct, hope and optimism are a poor defense against increasing OPEC production which is more than offsetting domestic declines in output.
To read the article in its entirety, please go to http://www.oilvoice.com/n/Morgan-Stanleys-Oil-Prices-Forecast-is-Wrong-Oil-is-Heading-to-50/19d637485fae.aspx .
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