Only a few months ago, everyone besides Andy Hall and a few others were proclaiming the death of Crude Oil, now with the price rising it seems like a different world.
Crude Oil Could Hit $50/bbl By May
The price of oil could hit $50/bbl by May according to Credit Suisse’s global equity research analysts. In a carefully phrased research report issued to clients at the end of last week, Credit Suisse’s analysts note that oil fundamentals began to improve in February and all along the oil supply chain, signs of stress are multiplying. What’s more, it seems as if the world is not quite “heading into a recession, or worst ” so demand also remains robust.
However, despite the improving fundamentals, Credit Suisse’s analysts note several times in the research note that they are not forecasting the low point of the oil cycle, or trying to bottom fish. Instead, they are merely drawing attention to the fact that there is upside risk to oil prices.
Crude oil: Upside risk
Most analysts covering the oil sector believe that the global supply/demand balance will correct itself in the second half of 2016. No one expects the supply overhang to clear in the next few months, thus, there are few if any analysts forecasting that the price of oil will return to $50/bbl anytime soon.
Nonetheless, the demand-side data is improving. Recent US economic data reduces the likelihood that its economy has tipped into a recession. Gasoline data for the weeklies show a strong rebound in February while the monthlies illustrate that the end-year swoon indicated by these weeklies actually did not happen. Moreover, Credit Suisse’s China research team has upgraded its outlook for the country’s economy that the risk of a “hard-landing” of that economy has reduced.
On the supply side, Credit Suisse’s equity analysts believe that many observers mistakenly called the US onshore crude oil production machine “resilient”. True, production last year stayed stubbornly high and beat expectations. But it is also true that strong growth trends were turned around. Onshore production declined by 600kb/d from its March 2015 through to December and is expected to fall another 600kb/d this year. And as almost all of the oil producers have slashed capital spending, this year maybe one with more downside (regarding production) surprises.
Sovereign producers are also talking which matters a great deal. The Saudis, Russians, Iraqis and Iranians may not be on the same page year, but they’ve all opened a book, and there are some signs that these production titans could be starting to come around.
Iran’s return to the market has been less explosive than many feared. Iran’s exports of crude oil have ramped by 500 kb/d up to an average of 1.5 Mb/d in February. In other words, Iran has returned to the market, and prices did not collapse.
Still, despite all of the above global crude inventories remain high and global refiner maintenance is approaching its April peak, which means stocks will continue to build for at least two more months. The path to recovery will not be smooth but as Credit Suisse’s analysts write:
“We are simply drawing attention to the fact that there is upside risk to oil prices. We highlight this now because upside risk is underplayed in nearly all our conversations year-to-date; and of course because the data have become more diversified, i.e. less bearish; and the unsustainable implications of extremely low oil prices are rapidly becoming more and more clear.”
“…we don’t want to underplay downside risk; it’s just that they seem to be reducing.”