As data emerges supporting a downturn in United States crude supplies, the market is now well into its rebalancing process and is at a “positive turning point” for crude oil prices, said a FirstEnergy Capital Corp. executive.
During a breakfast outlook session October 6, Martin King, vice-president of institutional research, stated that OPEC will hold to its high levels of production. While the return of Iran in 2016 will be a moderating influence on prices, it will not break the market either; a rebalancing will still proceed.
“It looks like we could actually be looking at some gradual improvement; it’s [going to be a] slow, bumpy process, probably unpleasant to watch at times, as we’ve seen in the last month or so, but nevertheless it is getting better out there.”
Price forecast
FirstEnergy now expects a 2015 average for West Texas Intermediate (WTI) of US$49.63 per barrel (bbl), up slightly from the previous $49 per bbl forecast. The outlook for 2016 remains unchanged at $57. The Brent average for the year was bumped up slightly to $55.12 from the previous $55, with the estimated average for 2016 also unchanged at $62.
The WTI-Synthetic Crude Oil (SCO) differential is now forecast at 15 cents for 2015, compared to the previous 64 cents, while the WTI-Western Canadian Select (WCS) differential is now forecast at $13.50 for the year, narrower than the previous $14.09. SCO for 2016 is expected to average a premium of 13 cents, while the WTI-WCS differential is forecast at $14.25, both unchanged from the old forecast.
“The catharsis that we saw at the end of August where you saw prices melt down, you had a huge market meltdown over three days then another huge rally for crude back out of that, … we think that’s kind of generally the bumpy bottom that everybody was kind of looking for.
“It’s a bumpy bottom; it’s not necessarily a rocket ship back to the top, but nevertheless, we think this is a positive turning point for crude oil,” King added. “We have turned the corner on this thing; we’re peeking around the corner, it is getting a little bit better. There are things you can point at that suggest the market is actually improving. One of those is the fact that U.S. crude oil supplies are starting to turn down — in an uneven fashion, but they are going lower.”
Chinese oil demand growth holds up
China has been a worry for the markets for more than two years, but oil demand growth has held up well, he pointed out, adding that Chinese demand will hold up much better than many expect. Chinese demand growth is forecast at 421,000 bbls per day for 2015, declining to 332,000 bbls per day in 2016.
In terms of the U.S., he said supplies could be down by one million bbls per day by year-end from the April peak.
“We’re starting to see U.S. supplies rolling over,” King said. The U.S. still has plenty of storage capacity, especially in PADD 3, “so fears of reaching full are overblown.
“You’re going to see inventories rise to some extent during the refinery maintenance season coming up, but it will not peak out anywhere close to what it did back in the spring of this year,” he added. “There’s still lots and lots of room to put barrels.”
Canadian crude oil supply growth of 43,000 bbls per day is forecast for 2015, with growth of 217,000 bbls per day expected for 2016.
“Our supplies are basically powered by the oilsands,” King said. “With all the projects that were in the hopper over the last couple years, most of these are still going through to completion, so you’re still going to see supply growth coming.”
OPEC situation
Led by the Saudis, OPEC is still pursuing its policy of letting prices balance the market, not its “willful supply actions,” King added.
“Price is the balancing mechanism for the market, it’s not OPEC,” he said. “There is absolutely no hints whatsoever from the Saudis … that they’re going to adjust [the] policy.
“They have lots of money; they’re prepared to sit back, put their feet up, maintain market share, maintain high production. But our view here is that the market can deal with its high production, both from Saudi, from Iran, from Iraq. There’s lots of barrels coming out of OPEC, but those are going to get soaked up throughout 2016 and 2017.”
He also said there’s “geopolitical fodder” pointing to Russia’s recent intervention in Syria, among other potential flashpoints.
“[There are] lots of things out there that could be a flashpoint for the market — we’re not counting on that,” King said.
World oil demand growth of 1.7 million bbls per day is forecast for 2015, with growth of 1.4 million bbls per day in 2016.
“In all likelihood, we’ll revise up that 2016 number of 1.4 — maybe we’ll throw another 100,000 or 200,000 barrels a day in that number,” King said.
