03/31/2015
Global / Industry
We believe that gradually improving demand-supply fundamentals will lead to some recovery in oil prices, but it is extremely difficult to determine how fast or how far that recovery will be.
If only we could forecast oil prices with a simple demand-supply equation. Alas, it is far more complicated nowadays. While we believe that gradually improving demand-supply fundamentals will lead to some recovery in oil prices, it is extremely difficult to determine how fast or how far that recovery will be. There are many economic structural issues to consider as well as a maze of global geopolitical shifts, conspiracy theories, and potential acts of one-upmanship. That said, if history is any indicator, it seems unlikely that oil prices will reach pre-crash levels, at least in the near term.
During the last few years, global oil markets have been changing, making them harder to forecast. In this report we will highlight some of the big issues, including OPEC’s refusal to cut production, the resiliency of US shale oil production, China’s slowing demand, and the geopolitical risks ahead. We also look at others factors such as a massive inventory buildup around the world, the strong US dollar, structural changes in the global economy, and how oil companies are responding.
We believe volatility will prevail in the near term, though there could be some eventual rebound in the medium to long term. Unfavourable trends on both the supply and demand fronts in the near term, as well as the strong US dollar will keep oil prices from breaking out at least before the second half of 2015. There could be high volatility in the market from spillover fears as the storage capacity in the US and OECD countries nears peak levels and until we see production cuts. We are tempted to call a market bottom for oil prices at US$45 per barrel (/bbl) that we saw in January 2015, but we are also not ruling out the odd wobble here and there over the course of the next few months.
We are reasonably confident at this point that oil prices will not tank and sustain at lower levels for long. This is because we do not expect OPEC to maintain production levels consistently at prices below US$40-50/bbl. That would be asking too much from some of the weaker OPEC member nations. From the second half of 2015 onwards, we expect some production cuts to kick in and support oil prices. But, in the absence of a strong demand push, the recovery in prices could be tepid at best. Thus, our base case scenario forecast for oil prices for the rest of 2015 is around US$55-65/bbl. For 2016, we project oil prices could be in the range of US$65-75/bbl.
To read the full report, download the PDF.
