A myriad of supply and demand forces continue to add downward price pressure on crude benchmarks. At time of writing, ICE Brent was trading marginally below $45 US dollars (US$) per barrel (b), whilst the NYMEX WTI contract traded above US$41/b.
In November, OPEC announced that crude stockpiles have ballooned to 3 billion barrels. Despite the supply overhang, Saudi Arabia and Russia are pumping record levels of crude output, contributing to a year-long surplus of 2 mbpd. In regards to Saudi Arabia, a reversal of such supply policy appears highly unlikely as the world’s largest crude producer strives to defend its market share. In terms of demand, the IEA has announced that - in part due to the rebalancing of the Chinese economy - global crude demand growth will drop to 1.2 mbpd in 2016, a sharp slump compared to 2015’s five-year high of 1.8 mbpd.
Brent forecasts saw small decreases across the forecast period. The supply overhang is expected to last longer than previously predicted because of capital productivity improvements in US shale, and as Iranian production may offset declining US supply. Analysts maintain their prediction of a medium-term recovery in prices as capex cuts and low spare capacity support Brent, although longer term oil prices are likely to be negatively impacted by deflationary pressure across the supply cost curve.
|Number of estimates||18.0||17.0||14.0||7.0|
Source: based on 18 external energy market analyst forecasts
Henry Hub forecasts have seen modest falls from last month. Supply growth continues to be robust, but improved demand growth from 2016 is expected to lead to a gradual recovery in prices. Analysts continue to expect an oversupplied market in the near term, although El Nino risks are increasing and could result in a more bearish outcome for 2016 prices
|Henry Hub (US$/MMBtu)||2015||2016||2017||2018|
|Number of estimates||17.0||17.0||13.0||7.0|
Source: based on 17 external energy market analyst forecasts
Technical price analysis: long-term picture remains weak
“The long-term technical picture for crude oil remains weak. The forming of a long-term bottom could take more time than most market participants expect. Prices still indicate weakness – especially since prices have made lower lows and lower highs. A further test and break to the downside of the US$40 support area seems likely. A significant close below this price would open the door for more selling pressures which could see a low of US$20. A medium to long-term upside move seems unlikley and will be nothing more than a short-term bounce.”
- Christian Kurz, Deputy Head Regulatory & Risk, Management, Commodities Trading, KPMG in Switzerland
Strong El Nino likely to keep US winter heating fuel prices under pressure
“North American meteorologists have begun prognosticating about the impact of a strong El Nino on this winter’s weather. NOAA predicts milder temperatures for the northern tier of the United States which could significantly reduce demand for heating fuels. With US natural gas inventories at record high levels for the end of October, the outlook for winter prices remains bearish. US East Coast distillate stocks are also relatively high compared to recent years which should maintain a cap on winter heating oil prices and volatility."
- Thomas G Ruck, Manager Advisory, Market/Treasury Risk, KPMG in the US
Chinese strategic petroleum reserve set for significant expansion
"Low crude prices and escalating geopolitical US-China tensions in the South China Sea, has prompted China towards expanding its strategic petroleum reserves (SPR). Central to its long-term foreign policy objectives, China – the world’s second largest crude importer – is bolstering its energy security through the ‘New Silk Road’ program. It’s set to increase its overall SPR from 200 to 550 MMbbl, enough to cover 90-days equivalent of its net oil imports; an inventory length that would rival that of the US (with 714 MMbbl). In building its SPR, China is positioning itself for a potential showdown with the US."
- Oliver Hsieh, Associate Director, Commodity & Energy Risk Management for ASEAN, KPMG in Singapore