Stubborn Oversupply to Curb Oil Price Recovery

LONDON: Crude oil prices are unlikely to rally much in 2016 as subdued demand growth looks unable to absorb rising supply from the likes of Iran and Iraq, even though non-OPEC output is expected to moderate, a Reuters poll showed.

The average 2016 price for benchmark North Sea Brent crude futures was forecast at $52.52 a barrel, $5.43 below the previous month’s poll, according to the survey of 20 analysts.

This is the seventh consecutive monthly Reuters poll in which analysts have cut their price.

In May, analysts forecast Brent to average $70.90 in 2016, but have been reducing their outlook ever since.

Thirteen of the 18 respondents who participated in both the November poll and the most recent survey, conducted in December, cut their average 2016 price forecasts for Brent futures, which averaged $53.79 in 2015.

Oil prices have been hovering around 11-year lows after falling to their lowest since mid-2004 in late December, as near-record-high production looks set to feed a global surplus.

“Even if non-OPEC production (US, Brazil, Canada) declines by 0.6-0.8 million barrels per day (bpd) in 2016, an increase in production from Iran and Iraq will continue to keep the market in an oversupply situation in 2016,” CRISIL Research director Rahul Prithiani said.

Analysts said high inventory levels could persist well into 2017 as it may take a while to clear the overhang in unwanted stocks.

“Demand growth will be impacted on account of the slowdown in Chinese demand growth, increase in efficiencies in the OECD (Organization for Economic Cooperation and Development) countries, substitution from natural gas and removal of subsidies in developing countries,” Prithiani said.

Analysts were not unanimous over whether lower prices would force the Organization of the Petroleum Exporting Countries (OPEC) to cut production.

A few believed OPEC might take some action if prices fell below $30, while others said there was no sense in the group cutting production unless demand collapsed significantly.

“The only scenario in which it makes sense for OPEC to cut production would be a collapse in demand, so a hard landing in China could potentially trigger such a move,” Capital Economics commodities analyst Thomas Pugh said.

Analysts saw US crude futures averaging $49.75 a barrel in 2016, compared with $53.73 forecast in November.

West Texas Intermediate crude futures averaged $48.90 in 2015.

ABN Amro had the highest 2016 forecast for Brent at $65 a barrel, while Nomisma Energia had the lowest at $38.08.



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