Wednesday, March 16, 2016

If oil prices have hit bottom, the top may not be too far away

From @Bloomberg -- The top of the oil market may be closer than you think.

With Brent futures having bounced back to $40/bbl, the International Energy Agency sees “light at the end of the tunnel,” and Goldman Sachs is spotting “green shoots.” Even so, many analysts warn that, like the failed rally last year, this recovery will sputter once prices go high enough to keep US crude flowing. “If prices keep going up, US production from shale producers is extremely responsive,” Jamie Webster, of IHS Energy, said. “Falling U.S. production is the key dynamic you need to get supply to equal demand, and that might not actually happen,” meaning prices could fall again.

Brent futures have recovered about 40% from the 12-year low of $27.1 reached in January. With output outside OPEC set for its biggest slump since 1992, “prices might have bottomed out,” according to the IEA. Yet world crude benchmarks may struggle to push past $50/bbl this year as any further price recovery only delays the production cuts needed to balance the market, according to the median of a Bloomberg survey of 9 analysts.

While US crude production has retreated 5.5% since last summer, the process of depleting bloated inventories is just getting started, according to Goldman Sachs. The bank, which foresaw oil’s plunge into the $20s, predicts prices still need to stay low enough to starve producers of capital, otherwise the output losses necessary to remove the supply surplus won’t happen. “An early rally in prices before a deficit materializes would prove self-defeating,” Jeffrey Currie, head of commodities research at Goldman Sachs said.

The recovery “could throw a lifeline to US producers” that would “limit oil production declines,” said Giovanni Staunovo, an analyst at UBS.

The argument that $50 represents a ceiling for crude is flawed, according to Sanford Bernstein & Co which sees prices returning to $70 in the next year. The industry can’t stay profitable at current price levels, having lost $3 for each barrel produced last year even as companies squeezed costs, it said.


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