Oil @ $50: Crude hits highest in 7 months; will it hit $100 this year?

Global oil prices are hovering tantalisingly close to the $50/barrel mark, with the price of West Texas Intermediate rising to a seven-month high of $49.36 per barrel at 12.51pm UAE time today (May 25, 2016). Brent crude prices were just a whisker behind, at $49.35 at the same time.

Analysts are unanimous in their belief that oil prices have seen their worst (prices fell to a 13-year-low of $27/barrel in late January this year), but most don’t expect them to climb back to $100/barrel anytime soon.

Paul Hosnell, Head of Commodities Research, Standard Chartered Bank, says oil prices are past their lows for the year. “We think that the low for the year is now in; Brent is not going to revisit prices below $30,” he told this website.

“We expect the global market to go into deficit in Q3 [2016], and expect stronger gains in the second half of the year as non-Opec supply falls heavily, particularly in the US,” Hosnell maintains.

Asked where does he see oil prices at the end of 2016, and Hosnell is categorical: “Above $60 for Brent. We expect a Q4 average of $66, with prices moving into the $70s during 2017,” he reckons.

M.R. Raghu, the head of research at Kuwait Financial Centre (Markaz), is a little less bullish on the end-of-year forecast, but that’s still about a 20 per cent jump from current prices.

“Given the circumstances, oil analysts believe that the oil price would hover at around $50-60/bbl by 2016-end,” says Raghu.

“We see equilibrium oil prices closer to the $60 mark, but this level is unlikely to materialise until excess supply levels are depleted, which we estimate will take until the end of 2016,” says Fahd Iqbal, Head of Middle East Research at Credit Suisse.

Yesterday’s data from American Petroleum Institute points to a further decline in US crude stocks, which dropped by 5.1 million barrels to 536.8 million last week.

The wildfires in Canada have resulted in a loss of about 1.5 million barrels a day over the past couple of weeks. “Unexpected disruption from big exporters such as Canada, Nigeria and Libya along with slowing output in Iraq all supported the bullish case, but whether prices can hold close or above $50 all depends on how fast output will recover in coming days,” says Hussein Sayed, Chief Market Strategist at FXTM.

These disruptions further accentuate the drop in supply as a result of the decline in the number of global oil rigs.

According to Baker Hughes data, the number of international rigs is down more than 31 per cent in less than two years, from 1,382 in July 2014 to 946 in April 2016.

However, analysts believe that a strong dollar and a less-than-spectacular global economy will keep a lid on oil prices going forward, and not many expect it to breach the $100/barrel mark this year.

“The inverse correlation between the US dollar and oil seems to have been ignored in recent days. Although the dollar appreciated by more than 2.7 per cent against a basket of currencies since the beginning of May, US oil rose by more than 7 per cent in the same period to trade at a premium to Brent and at the highest levels seen since October last year,” says FXTM's Sayed. 

Yesterday, Norway’s petroleum and energy minister Tord Lien was dismissive of the $100/b price. “It’s better to plan for $60 and let the people who want to hope for $100, hope for $100,” he said in a Bloomberg TV interview at the ministry’s offices in Oslo.

Energy expert Daniel Yergin, vice-chairman of research firm IHS Inc., told AP earlier this week that, “unless there is some big surprise or disruption, they [oil prices] wouldn't go back to $100 a barrel.”

In addition, with Opec’s forthcoming meeting unlikely to come to a consensus on production freeze, any potential gains in oil prices may be limited.

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