Four reasons why weakness in oil prices won’t last long
Baku, Azerbaijan, May 5
By Leman Zeynalova – Trend:
The pessimism about the oil market is overdone and the prices are expected to rise over the second half of 2017, says an analysis done by the UK-based consulting company Capital Economics.
The analysis, obtained by Trend, shows four reasons why the current weakness in oil prices will not last long.
“First, the increase in the headline stock number in the US is a little misleading. At least part of the strength in US commercial crude stocks is the result of the US government selling oil from its Strategic Petroleum Reserves,” said the analysis. “What’s more, it seems likely that stocks are being relocated from expensive but difficult to track storage options, such as tankers, to cheaper storage facilities in the US where they are more visible to investors.”
The Capital Economics analysts say that even though crude oil stocks have been growing, total inventories of petroleum products have been falling sharply in the US.
“Second, OPEC is likely to extend its cuts by at least three months at its meeting at the end of the month,” said the analysis. “Compliance, both from OPEC members and the other countries which signed up to the deal, has been better than expected and the recent drop in prices will only increase the pressure on the group to rollover its deal.”
“Third, US oil production growth has, quite rightly, been a major concern for the market over the past year or so,” says the consulting company.
“Indeed, US oil output has already risen by over 0.5 million barrels per day since the start of the year. However, based on the previous relationship between the number of active drilling rigs and oil prices, growth in the US rig count should start to level off soon,” said the analysis. “This should prevent US oil production from accelerating at the same rate in the second half of the year.”
“Fourth, increases in economic growth should keep oil demand strong,” according to Capital Economics.
As a result, Capital Economics is sticking with its end-2017 forecasts of $60 per barrel for Brent and $58 per barrel for Western Texas Intermediate (WTI), although, the company cautions that prices are likely to be especially volatile over the next few months.
Follow the author on Twitter: @Lyaman_Zeyn