Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
Land Rover Discovery Sport Rattling / Knocking Sounds From Car Pillars - 25th Apr 18
China Takes the Long View on Gold-Silver... and So Should You - 25th Apr 18
Russia Buys 300,000 Ounces Of Gold In March – Nears 2,000 Tons In Gold Reserves - 24th Apr 18
Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - 24th Apr 18
CRYPTOCURRENCY MASTERCLASS #CRY90 - 24th Apr 18
UK Gambling Statistics - What the Numbers Say - 24th Apr 18
Chaos Capitalists Short Countries - How Chanos Got China Wrong - 24th Apr
Artificial Intelligence Defines the Political News Narrative - 24th Apr 18
Stock Market "Oops, They Did It Again" - 24th Apr 18
Fox in the Henhouse: Why Interest Rates Are Rising - 23rd Apr 18
Stocks and Bonds, This is Not a Market - 23rd Apr 18
Happy Anniversary Silver Investors! - 23rd Apr 18
The Hottest Commodity Play In 2018 - 23rd Apr 18
Stock Market Correction Turns Consolidation - 23rd Apr 18
Silver Squeeze, Gold Fails & GDX Breadth - 23rd Apr 18
US Economy Is Cooked, the Growth Cycle has Peaked - 23rd Apr 18
Inflation, With a Shelf Life - 23rd Apr 18 - Gary_Tanashian
Stock Market Predictive Modeling Is Calling For A Continued Rally - 22nd Apr 18
SWEATCOIN - Get PAID to WALK! Incentive to Burn Fat and Lose Weight - Review - 22nd Apr 18
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

Crude Oil Price $85 Forecast By Christmas

Commodities / Crude Oil Apr 08, 2016 - 10:05 PM GMT

By: OilPrice_Com

Commodities

After a 50 percent rally in oil prices between February and March, crude has retreated a bit as of late. The upcoming OPEC-Russia meeting in Doha looms over the markets, but few expect the outcome to have any material impact on supply and demand. Global supply still exceeds demand, but there are solid signs that the overhang is finally starting to ease. Storage levels are high, but are expected to come down.


Where does that leave us? With so many energy investors unsure of where the markets are heading, Oilprice.com decided to get in touch with Mike Rothman at Cornerstone Analytics - a macro energy research firm that has produces some of the most accurate data out there. Oil prices may be gyrating up and down, but Mr. Rothman provided some juicy clues for investors, highlighting some key near-term trends for crude oil.

A few topics covered:

• "Missing" IEA oil barrels
• Why oil markets are tighter than people think
• What to expect from the OPEC-Russia meeting in Doha
• Why oil prices could spike
• Where investors should put their money
• Mr. Rothman's prediction for oil prices at the end of 2016

Oilprice.com: The IEA has been accused of overestimating global supplies. The WSJ says that somewhere around 800,000 barrels per day are unaccounted for, meaning they are not consumed nor have they ended up in storage. Are these "missing" barrels a big deal?

Mike Rothman: The issue has not been one of the IEA over-estimating supply, but rather under-estimating demand. There are basically two ways to arrive at figures for global oil demand. The IEA methodology is built on an estimate of GDP and an assumed ratio of oil demand growth to GDP growth.

For the emerging markets in particular, that methodology represents a leap of faith since there are >100 countries and close to real time measures for economic activity rank up there with seeing unicorns and leprechauns. Also, in countries where we have better and more timely data for demand and GDP (like the U.S.), we see that oil demand growth to GDP growth ratio fluctuate sharply.

The other way to measure usage (which is what we do at Cornerstone Analytics) is to assess how much physical oil the global system is absorbing. It's called "apparent demand." It presumes global oil production data is close to the mark - which is the evident historical pattern - and that inventory changes in the OECD are the proxy for global storage changes. Basically non-OECD countries use oil on a hand-to-mouth basis with the primary exception really being China -- whose stockpiling has actually been smaller than generally believed. "Missing oil" is the gap that we see between econometrically estimated demand and apparent demand. Historically, bouts of "missing oil" are resolved by the IEA revising up its demand series. The underlying issue is generally an underestimation of oil consumption in the non-OECD countries.

OP: Are oil markets actually much tighter than everyone thinks?

MR: Yes, in the sense that storage is not as high as generally presumed and yes in the sense that OPEC's spare production capacity is much more limited than generally believed. But, to be realistic, because petroleum stocks in the OECD countries (which is the proxy for global stores) are high, there is no real concern in the market about availability, yet. We think this changes starting in the current quarter because we forecast global oil inventories will be drawn down contra-seasonally.

OP: What is Saudi Arabia's position coming into the production freeze? Are they winning the oil war - or are they rather desperate at this moment in time? Data compiled by FGE energy consultancy suggests that Saudi Arabia is losing its leadership position in 9 out of 15 of its major markets .

MR: Our sense is that Saudi Arabia put itself in a position whereby it will wait for global supply/demand to rebalance itself. Most market watchers don't really understand that back in 2014, the Saudi aim was about coercing a handful of OPEC countries to make production cuts to counter what was a collapse in the "financial demand" for oil. While Saudi Arabia has been burning through $12-$15 billion per month from its financial reserves to fund government spending through this period, it seems the policy is that the path to a much higher price (and higher revenue) will come about by allowing for a prolonged low price.

OP: What can we realistically expect from the OPEC/non-OPEC meeting in Doha?

MR: At most, countries may agree to freeze output, which may sound encouraging but in reality is little more than an agreement of the lowest common denominator since they are basically capacity constrained to begin with. To defend a price, OPEC would need to actively take barrels "out of the hands" of refiners - that is, a production cut, the current prospects for which lie somewhere between slim and none.

OP: Do you expect oil to fall back below $30 if Doha turns out to be disappointing?

MR: No, but that's partly because we think the oil balance will be transitioning into a deficit in 2Q and because many will come to realize that a production freeze is not a viable plan to cause the oil balance to tighten.

OP: The oil industry is making massive cuts in investment. Should we be bracing ourselves for a price shock at some point in time? If yes when do you see this occurring?

MR: You cannot cut CAPEX and reduce upstream activity and somehow think future production growth goes unaffected. We forecast non-OPEC supply to contract this year for the first time since 2008. That was a way-out-of-consensus call to make a year-ago when most pundits vigorously argued non-OPEC production would still expand even with the drop in oil prices. What we've communicated to our clients - and those we deal with directly in OPEC - is that the spike down in oil prices is basically setting up an eventual spike up.

OP: Will bankruptcies in the U.S. shale industry do anything to balance the market?

MR: We expect that it will feed into the contraction we forecast for U.S. output. We also see the credit availability issue as likely being a limiting factor moving forward, sort of like what we saw in 1986 and then again in 1999.

OP: Where should investors look if they want to put money in the energy market? What types of companies will perform well over the next year?

MR: Since energy equities basically trade as a proxy for the commodity, it's safe to say all boats rise when the tide comes in. The "beta" names typically include the Oil Services sector and E&Ps. The most leveraged play would be the commodity itself (or a vehicle like the USO).

OP: Lenders to the oil and gas industry have been fairly lenient with companies. Do you believe that the banks will start to tighten the screws a bit more as the periodic credit redetermination period finishes up?

MR: The old joke is that bankers are the guys who will lend you an umbrella and then ask to have it returned as soon as it starts to rain. Yes, we think lending will become much more highly scrutinized and financing less readily available.

OP: Can oil break out from $40 per barrel anytime soon?

MR: Sure. All it takes is one outage of consequence. More generally, though, we think oil breaches $40 during 2Q as physical evidence becomes available about inventories drawing down globally.

OP: Where can you see oil heading over the next 3 months, 6 months and 1 year out?

Our target is Brent crude at $85 by the end of 2016.

OP: How do you see the U.S. presidential elections impact U.S. oil and gas policies? What could be the most radical change for oil and gas?

Ask me after the election...

OP: Thanks for taking the time to speak with us Mike.

By Nick Cunningham of Oilprice.com

© 2016 Copyright OilPrice.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

OilPrice.com Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules