Oil Price Recovery to Overlook Divided OPEC – Danske Bank

Oil Price Recovery to Overlook Divided OPEC – Danske Bank

20 April 2016, 06:51
Roberto Jacobs
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Oil Price Recovery to Overlook Divided OPEC – Danske Bank

Senior Analyst, Jens Nærvig Pedersen at Danske Bank, notes that the decline in the oil price following the failed attempt in Doha on Sunday to reach an agreement among major world oil producers on a production freeze proved to be short-lived.

Key Quotes

“The strike among oil workers in Kuwait has been getting some attention in light of this move but, in our view, this should be viewed as an insignificant temporary disruption.

We believe the price action indicates the following: (1) the production freeze talks have not mattered much to the past month’s 50% rally in oil prices, (2) the oil market has called Saudi Arabia’s bluff to scare other producers off by threatening to raise production further and (3) another attempt to talk up the oil market ahead of the 2 June OPEC meeting is likely to prove fruitless. The bottom line is that all producers present in Doha are producing close to full capacity and are not expected to increase capacity substantially in the near future. Hence, unless outright production cuts are brought to the table, their leverage over the oil price should be minimal.

In our view, there is room for further recovery in oil prices; however, the push should primarily come from the demand side, which we think has been the primary factor lifting oil prices out of the early February slump. In coming months, we are looking for further improvement in the outlook for global economic growth supported in particular by the recent recovery in the US manufacturing sector and indications that construction activity in China have started to turn for the better and a continued slide in USD to benefit oil demand and drive oil prices higher.

Attention in the oil market should, therefore, turn to the meeting in the European Central Bank on Thursday and in the Federal Reserve next week. A UK vote to leave the EU on 23 June could weigh on growth in Europe and temporarily halt further recovery in oil prices, but this is not part of our main scenario. In addition, further consolidation in US oil production is set to continue in the medium term and is already factored into the forward curve, while we see some risk of production falling further than official supply forecasts.

On this basis, we still look for the price on Brent crude to average USD46/bbl in Q4 16 and USD52/bbl in 2017. This implies that the price on jet fuel should average USD508/MT, ULSD USD465/MT, 0.1% gasoil USD450/MT and 3.5% fuel oil USD234/MT in 2017, respectively.”

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