The oil price is sliding again and just as they did before, analysts are now rushing to issue the most bearish forecasts possible for the black gold.
Source, the Multi Asset Research platform, is one outfit that has stuck to its pessimistic price forecast for oil since the beginning of the year despite the positive price action.
Source’s analysts believe that the price of oil could fall to $20 a barrel in the near-term as mean reversion works to bring the price back into line with historical averages.
Oil: Still on track for $20?
Analysts write that in today’s dollars, while has spent 80% of the past 150 years trading in a range of $20 to $60 a barrel. When falling from a peak, oil has systematically dropped to the bottom of this range.
There is fundamental evidence to back up this claim as well. During 2015 it became clear how the market reacts to lower prices. Last year the oil industry hiked output despite lower prices, only exacerbating the oil market’s oversupply. Output increased by 3.2% despite falling prices and record inventory levels while consumption only increased by 1.9%.
A false rally?
Since the beginning of the year, the price of oil has trended higher on speculation that the market has moved into deficit as declining production and supply disruptions help the supply/demand imbalance work itself out.
However, there have been no significant declines in production. OPEC has still not taken any action to cap or reduce production; inventories remain elevated, and there’s already talk about shale producers in North America restarting production with a new approach to the oil business, targeting capital returns over growth at any price. And in a new research note on oil published at the beginning of this week, Source claims that the oil demand picture is much weaker than official figures suggest.
According to the note, China crude import volumes were up 14.2% year-on-year the first half of 2016, despite GDP being up only 6.7%. Adding in domestic production of 4.3 million barrels per day to the 5.7 million barrels per day of net imports gives a total supply around 11.8 million barrels per day during the first half. China’s oil demand is estimated around 10.4 million barrels per day suggesting that the country has been adding around 1.4 million barrels per day to its reserves during the first half, creating somewhat of a demand illusion.
Source’s demand illusion warning came a day before Morgan Stanley published a research note highlighting that Russia’s 2016 hydrocarbon liquids production has grown by 170kbpd year-on-year prompting IEA and OPEC to upgrade their forecasts by 300 to 400kbpd from mid-2015:
“Russia’s production is not just resilient; it will grow for another two years. While the focus of the market has been elsewhere when it comes to supply risks (Iran, Libya, etc.), Russia’s 2016 production to date has grown by c170kbpd YoY, prompting IEA and OPEC to upgrade their forecasts by 300- 400kbpd from mid-2015.This appears material in the context of global oversupply. The market is debating if this is sustainable. We believe Russia will continue to grow in the next two years, by >300kbpd from 2016 levels. Our confidence stems from our discussions with companies (including the launch and ramp up plans for key greenfields). Also, Russian producers benefit from a competitive cost base (partly backed by RUB depreciation) and regulatory regime set up” – Morgan Stanley