Analysts Turn Bearish on Oil Again
August 04 2016 - 07:30AM
Dow Jones News
Banks are getting bearish on oil again.
Analysts have cut their outlook for oil prices for the first
time in four months, concerned about the continued oversupply in
crude that has already sunk this year's market rally.
A survey of 13 investment banks by The Wall Street Journal
predicts that Brent crude, the international oil-price benchmark,
will average $56 a barrel next year, down by more than a dollar
from June's survey. The banks expect West Texas Intermediate, the
U.S. oil gauge, to average $55 a barrel next year, down almost a
dollar from the previous survey.
Oil prices nearly doubled earlier this year amid expectations
that falling U.S. production would help alleviate the oversupply
that has plagued the industry for the last two years. But that
rally has petered out in recent weeks as big oil producers increase
their output and gasoline inventories continue to swell.
"There is still a lot of oil out there and the sentiment is
pretty bearish," said Michael Wittner, chief oil analyst at Socié
té Gé né rale SA "For the time being, the path of least resistance
for oil prices continues to be lower."
U.S. crude entered a bear market earlier this week, dipping
below $40 a barrel for the first time since April. In early morning
trade Thursday, Brent was trading down 0.7% at $42.79 a barrel,
while WTI was down 0.3% at $40.71 a barrel.
The banks in the survey see oil prices staying below $50 a
barrel until the end of this year and rising to $60 a barrel by the
end of next year. Last summer, many of the same banks were
predicting oil prices would rise to more than $70 a barrel this
year.
At the end of July, hedge funds and other speculative investors
had cut their bullish bets on Brent to their lowest in more than
five months, data from the Intercontinental Exchange Inc. showed on
Monday. Last week, speculative investors in U.S. crude added nearly
15 times more bets on the crude price falling than on it rising,
according to data from the U.S. Commodity Futures Trading
Commission.
One of the main culprits for the reversal in the oil price is a
growing glut of gasoline around the globe. Refineries have taken
advantage of the fall in oil prices and gone on a buying spree in
the past two years. Consumption hasn't been able to keep up with
the new production, leading to near-record 500 million barrels of
gasoline put into storage around the world, according to Citigroup
Inc.
Few oil producers, meanwhile, show signs of cutting output.
Russian production is running near the post-Soviet high it reached
earlier this year. Production from Canada and Nigeria, where a
spate of outages knocked off more than 3 million barrels a day in
the spring, is now coming back online.
While U.S. crude output continues to decline—last week output
fell to 8.5 million barrels a day, from 9.5 million the same time
last year, according to official data—some drillers have ramped up
activity in recent weeks.
On Friday, Baker Hughes Inc. reported that the number of rigs
drilling for crude in the U.S. has risen by three to 374, the fifth
straight week of increases. That could slow production declines and
even cause output to start rising again, analysts say.
"The timeline for market rebalancing has slipped in recent
weeks, through a combination of weaker demand growth, a quicker
rebound in supply from Nigeria and stronger-than-anticipated output
from Saudi Arabia, Russia and others," analysts at J.P. Morgan said
in a recent report.
Concerns about the global economy have also clouded the outlook
for crude. Analysts say that Britain's surprise vote to leave the
European Union in June could have knock-on effects on oil demand in
Europe, given its likely impact on the regional economy.
Still, few analysts expect prices to fall to the decade lows of
below $30 a barrel that were hit in the first quarter of the year.
That trough was reached as the global oversupply hit its highest
level.
"The global market is getting back into balance in the second
half of this year and the beginning of next," said Mr. Wittner of
Socié té Gé né rale, who expects crude prices to bottom out in the
high $30 range. "We're not going down forever."
(END) Dow Jones Newswires
August 04, 2016 07:15 ET (11:15 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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