Oil prices: On a slippery slope

Experts at Goldman Sachs expect another oil glut in 2018 as prices head down again on swelling US crude oil inventories

Another selloff in oil prices could blast through what is left of bullish support as Brent crude oil future is testing an area of support created by the 200-day simple moving average and trend line from $50.74 to $50, Bank of America Merrill Lynch said. West Texas Intermediate crude oil future is testing key trend line and support at $46.75-47.18, BofA Merrill Lynch said. Experts at Goldman Sachs expect another oil glut in 2018 as prices head down again on swelling US crude oil inventories, with Brent dropping below $50 per barrel for the first time this year last week.
They fear that Opec deal that has taken more than one million barrels per day of oil off the market has not succeeded in reversing this bearish trend for inventories. With the deal at its midway point, focus is shifting towards an extension of the cuts through the end of the year.
However, Goldman Sachs warns that another downturn could come over the next three years, sparked by a new wave of supply stemming from megaprojects planned years ago. These projects cost billions of dollars and take many years to bring online, and many of them were initiated back when oil prices traded at $100 per barrel. "2017-19 is likely to see the largest increase in mega projects production in history, as the record 2011-13 capex commitment yields fruit," Goldman said in a note. "This long-lead-time wave of projects and a short-cycle revival, led by US shales, could create a material oversupply in 2018-19."
Goldman identified a handful of projects in Brazil, Russia, Canada and the Gulf of Mexico that will reach completion and add to global supply between 2017 and 2019. Combined with new shale output, these projects could add another one million barrels per day next year.
Analysts, who are following the $1.8 trillion-a-year oil market, are tempering bullish price outlooks after oil lost about 10 per cent of its value in less than two weeks amid ominous signs the worldwide supply glut may not be shrinking. Most analysts believe that prices have entered a bearish trend despite short-term bounces, supply cuts and improved demand estimates.
The lateral range of $50-$55 a barrel was recently broken, with the new long-term support level for Brent edging closer to $45-$47 rather than $50 a barrel. With money managers' net length exposure to crude prices at the highest level in months, the risks for oil prices seem tilted to the downside. More critically, there are ongoing concerns about the scale of the recovery in US shale production, which could undermine the cuts.
Vijay Harpalani, Fund Manager, Asset Management, Al Mal Capital: "We expect shale producers to bring more supply to the market which will balance the prices again.  
The significant increase in oil prices since last year has created positive momentum to the business in the GCC countries, being highly correlated to oil revenues.
This is an ongoing global initiative to bring in clean and efficient energy to the world. However, there is a long way to go for renewable energy sources to take a lead in the energy market - for the foreseeable future fossil fuel will continue to dominate the energy landscape."
The US Energy Information Administration said that US production had risen for a fourth consecutive week, to 9.13 million barrels a day. Traders see the booming crude reserves as evidence of the excess of supply in the country.
Private-sector body the American Petroleum Institute (API) estimated that crude oil reserves grew by 4.5 million barrels last week, well above expectations for a build of 2.8 million barrels.
Brent crude, the international oil price benchmark, was down 1.6 per cent in London this morning, hovering a little above the $50 a barrel threshold. Its US counterpart West Texas Intermediate, which is more directly affected by the report, was down 1.5 per cent to $47.50 a barrel. It hit a high above $54 earlier this month.
The oil market rallied strongly following last November's deal by producers including Opec and Russia to cut 1.8 million barrels a day from output, which it was hoped would help to end two years of persistent oversupply.
Ole Hansen, head of Commodity Strategy of Saxo Bank: "Crude oil is likely to remain range-bound for the foreseeable future. A high degree of compliance from Opec and non-Opec producers has, at this stage, been priced into the market, while the upside is increasingly being capped by signs of rising production from US shale oil producers. In the short term, this has left the risk skewed to the downside. Should the US introduce import tariffs on oil we could see WTI spike, while Brent (and Oman/Dubai) will struggle. Demand for domestically produced US crude will rise while the risk of lower imports could leave the global market oversupplied, thereby forcing additional cuts from Opec producers in order to maintain price stability."
With compliance with the deal reported to be high, prices have remained steadily above $50 a barrel so far this year. However, this has led US production to surge and, after two years of producers driving down costs, renders much shale drilling profitable again.
Tudor, Pickering, Holt & Co International, the Houston investment bank, has slashed its 2018 forecast for the dominant North American crude, West Texas Intermediate, by 13 per cent to $65 a barrel. The reason: They see US output rising by 1.2 million barrels a day in that time, 50 percent more than in an earlier forecast.
That level of increase, layered on top of uncertainty over how long Opec will hold to its deal to cut production, has since January 3 shaved about $8 off the price of the global benchmark, Brent.  
For the second half of 2017, Tudor reduced its price estimate by $10 to $62.50. It isn't alone in its reassessment. JPMorgan Chase & Co revised its US price forecast downward for the second half of 2017 to $53.75 and Brent to $55.75, anticipating both will drop by another 25 cents in 2018. The analyst, David Martin, didn't disclose his previous price forecasts.
The half-decade span of 2010-2014, when oil averaged more than $100 a barrel, spurred oil companies to embark on some of the riskiest, costliest exploration ventures in the history of the petroleum industry in search of new barrels. The subsequent flood of supply - and its negative impact on prices - shows little sign of receding.
- issacjohn@khaleejtimes.com

Issac John

issacjohn@khaleejtimes.com