Banks Slash Oil-Price Forecasts Again
Jan 12, 2016
As the price of oil scrapes $30 a barrel, analysts are making deep cuts to forecasts, reflecting increased concerns over crude demand from China.
After oil hit a 12-year low in the early weeks of 2016, predictions of a recovery this year have been dialed back.
Brent crude, the international oil-price benchmark, will average $50 a barrel this year, according to 12 banks polled by The Wall Street Journal, down $7 from the survey in December. The banks see West Texas Intermediate, the U.S. oil gauge, averaging $48 a barrel this year, down $5 from the previous survey.
On Tuesday, Brent was trading at $31.20 a barrel. Crude prices are down from over $100 a barrel last summer, after a combination of oversupply and weaker demand created a crude glut.
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Analysts now say prices could fall to near $20 in the next few weeks, a view seen as left-field just last month. One bank, Standard Chartered, thinks crude could fall to as low as $10 a barrel, though that is not the lender’s main price scenario.
Like equities, metals and some corporate credit, the price of oil has been pummeled this year by concerns over the Chinese economy.
Oil analysts and investors have been watching bearish signals such as inventory and production levels, for more than a year. Now they include Chinese stock indexes.
The Shanghai Composite Index is down around 15% in the new year.
“It’s easy: if Chinese equities collapse, oil prices will collapse,” said Hamza Khan, head of commodity strategy at ING Bank, one of the survey’s banks. “The oil market operates on sentiment and that is extremely bearish right now.”
China is not a new worry for oil traders. The country is the world’s No. 2 consumer of crude and concerns over its economy led crude lower during last August’s China-inspired markets’ turmoil.
What is new is that data on Chinese demand now reflects the weakening economic picture and fears that demand is falling.
The most recent data show that oil demand contracted 4.9% in November over the previous month, and 2% over the year in November. That is the first decline since July 2014, according to Barclays.
China’s appetite for crude helped global oil demand growth hit a five-year high last year.
As the oil price has fallen, analysts’ prediction have come down with it.
Last summer, many of the banks in the survey were predicting oil prices would rise to more than $70 a barrel in 2016. Now, the banks expect prices to stay below that level into next year, with Brent seen averaging $67 a barrel in 2017 and WTI seen at $63.50 a barrel. The banks in the survey have downgraded their average forecast every month since August.
Continued weakness in the oil price is welcome news for consumers and businesses around the globe. Drivers in the U.S. are paying for the cheapest gasoline in years, with prices at the pump averaging $1.956 a gallon on Tuesday, according to auto club AAA.
But it brings further pain for oil-producing economies from Russia to Venezuela. Low prices are also hitting the bottom lines of oil companies, many of which are already bracing for lower crude for longer.
On Tuesday, British oil giant BP PLC said it will lay off about 4,000 workers from its exploration and production business over the next year or so. In the U.S., as many as a third of oil-and-gas producers could tip toward bankruptcy and restructuring by mid-2017, according to Wolfe Research.
China is one of a host of factors pressuring oil.
A warm winter in the U.S. and Europe is adding to the market’s problems. That has shaved off about 200 thousand barrels a day of demand in each region, according to bank of America Merrill Lynch.
The biggest issue is still oversupply, as major producers like Saudi Arabia and Russia pump at full tilt to defend market share. This year, markets will also get hundreds of thousands of barrels of Iranian oil, after the nuclear deal struck between global powers and Tehran last year promised a lifting of some sanctions on the country.
U.S. production, meanwhile, hasn’t fallen as much as anticipated. It peaked in April at 9.7 million barrels a day. Since then, the pace of declines has been slow, with output steadying at around 9.2 million, according to the U.S. Energy Information Agency.
“The market has lost confidence that U.S. shale will decline quickly enough to perform its job this year of beginning the global rebalancing process,” Michael Wittner, chief oil analyst at Société Générale S.A., said in a report this week. “The risks to the 2016 outlook are mainly to the downside.” |
