Drag on oil prices likely to continue

Expectations of a persistent global oil glut into 2017, largely stemming from a revised projection for Opec production in the coming year, has led the BNZ to revise its forecasts moderately.

The bank now expected oil prices to stay below $US70 ($NZ105.53) a barrel for the rest of this year and next, head of research Stephen Toplis said.

''After recording gravity-defying price gains in April and May that are largely denominated by correlation with the US dollar, oil price movements turned bearish in June and July-to-date.

''Investor sentiment in the oil market has soured over the period on the back of key international events: a sharp correction in Chinese equity markets, Greece's high-profile political wrangling over its debt crisis and the lead-up to the conclusion of a nuclear deal between Iran and the world's powers.''

Meanwhile, the rising trend in global oil supply - despite current low prices - also constituted a dragging force on prices, he said.

In June, the Brent and Tapis indices fell by 4% and 5% respectively while WTI charted a modest 1% increase to average at $US63, $US64 and $US60 a barrel.

So far in July, oil prices had weakened further to average around $US58, $US59 and $US52 a barrel for Brent, Tapis and WTI respectively, Mr Toplis said.

One year on since the advent of the global oil price collapse, the expected price response from US supply had been more contained than most analysts had expected at the start of the crash.

US production was hovering around its record levels of 9.6 million barrels a day (mb/d) after an initial slowdown in March and April was quickly reversed when prices rallied in April and May.

Additional supply upside risks had now emerged from the Opec region, with a Saudi-led production increase resulting in the organisation's aggregate output levels exceeding their quota of 30 mb/d for the 13th straight month in June.

''We are also likely to see a lift-off in Iranian oil output in its post-sanctions era, projected to take place somewhat moderately in the first half of 2016 before rising more substantially towards maximising its output capacity by the end of 2016.''

The Iranian Government had signalled its ambitions to lift oil output and exports significantly but there were questions around the rate of recovery and final output level achievable, he said.

Iran had the world's fourth-largest proven oil reserves and was producing around 2.9 mb/d compared with 4 mb/d just before the sanctions. Its record production rate was 6 mb/d in 1974.

The global oil market remained in a surplus of about one and a-half million to two million barrels a day, Mr Toplis said.

Global demand was expected to continue to grow for the rest of the year and 2016.

However, the continuous rise in Opec production, especially that stemming from Saudi Arabia and Iran, was expected to outweigh the fall in non-Opec output.

The speed with which Iran expanded its output would not only depend on how quickly it could overcome some of the physical constraints on production but also its strategies to manoeuvre in an increasingly competitive and politically-charged environment within Opec, he said.

The diminished powers by Opec to influence global output and prices had seen major producers within the organisation resorting to price wars through aggressive output expansion and heavy price discounting, straining the political ties among members further.

''The current low-price environment, if prolonged, may serve to exacerbate the financial difficulties faced by high-cost members such as Libya, Algeria, Venezuela and Yemen, giving them an incentive to act in an unco-operative manner and perpetuate the race to the bottom.''

Despite being engaged in an ongoing war with Islamist rebels, Iraqi oil exports had risen significantly since late 2013 and had charted a record during March this year, Mr Toplis said.

 


 

Main points

• Oil prices expected to remain below $US70

• Supply likely to rise as Iran allowed to sell its oil

• Demand likely to rise from China, India and the United States

• Saudi Arabia loses control of Opec 


 

Add a Comment