Barriers remain, but oil above $50 in Q4 2016 likely: RBC
Crude oil prices are up today despite news over the weekend that no deal regarding the crude oil production freeze between OPEC and non-OPEC producers could be reached. Talk surrounding the deal bolstered crude oil prices in the months leading up to the Doha meeting, and many market observers feared that the absence of a deal would send prices plummeting again. Production tapering off in the U.S., as well as supply outages in Kuwait due to strikes helped to offset the Doha news, and prices continue to climb above $40 per barrel today.
Royal Bank of Canada expects prices to continue climbing, with RBC calling for a baseline WTI price averaging $50 per barrel in the fourth quarter of this year. The bank believes that stocks will begin seeing draws for the first time in several years in Q4 as well, as demand begins to absorb declining global oil output. RBC calls this the first tier of its price forecast, which the bank sees happening quickly, but the second tier will require more time.
Two walls of resistance
“While the market remains extremely fluid, we anticipate that prices will encounter two fairly sizable walls of resistance near the $50-$55 per barrel level,” a note from the bank read. “First, we anticipate that U.S. production will be increasingly elastic in a rising price environment… The second wall of resistance will come from the financial markets, with vastly under-hedged U.S. producers looking to aggressively shore up price protection near those levels.”
As prices begin to increase, U.S. tight oil producers will be able to quickly bring new production online, creating downward pressure on the price of oil. Adding to the supply side of the problem, increasing production in Iran is partially offsetting production outages in other parts of OPEC like Kuwait. Increases in Iranian exports will likely lose steam though, as RBC suspects that growth beyond 400-600 MBOPD in 2016 will require significant additional investments that are unlikely to bear fruit within the next 24 months.
In the meantime, RBC sees Iran trying to increase its market share in Europe, particularly the Mediterranean, where supply outages in Iraq have left room for Iran to re-enter the market. Iran is also expected to price its crude oil aggressively in emerging Asian markets like China and India where Saudi Arabia has traditionally been the largest supplier of crude oil.
Once longer-term equilibrium has been reached, RBC predicts prices will reach the high-$60 to low-$70 per barrel range in the next 18-24 months. The bank said this is largely contingent on the visibility that inventories are on the path to returning to historically normal levels.
