Ratings agency analyst says re-test of January low certain, but 'mid-price' future looms
A "re-test" of the $45-a-barrel low for the benchmark Brent crude oil price is "inevitable" in the near future as supply prices continue to squeeze the market, an analyst arm of Fitch Ratings has said.
The comments from BMI Research, quoted by Reuters, came in the wake of major falls on Monday that saw the price dip below $50 for the first time in six months. A price of $45 would be symbolically significant in the UK as it is the level at which petrol prices below £1 a litre become a distinct possibility.
The Financial Times notes the first trading session in August brought a fall of 5.2 per cent to $49.52 as data showed global production continuing to rise, adding to oversupply concerns, with worries persisting over a manufacturing slowdown in China. Commodities markets have recovered some "poise" in Tuesday trading, the FT says in a separate report, and Brent has moved back marginally above $50.
BMI said prices would remain depressed in the coming months amid pressure from a strong dollar, weakening Chinese economy and the prospect of Iranian oil further flooding the market. "A re-test of Brent crude's 2015 low around $45 per barrel looks inevitable given current ample market supply and intensifying bearish market sentiment toward prices," the firm said in a note to clients.
But analysts say it is unlikely there will be a return to the significantly below $50 norms pre-2005, or the high $100-plus levels the market had become accustomed to in recent years. Instead a "mid-price era" is now looming: BMI itself said it expected prices to move back towards $60 in 2016, in line with consensus forecasts of a return to $60-$70.
In the short-term, however, the trend is down. Sabine Schels, a commodities strategist with Bank of America Merrill Lynch in London, told the Wall Street Journal "we are probably a few dollars away" from a bottom, while David Hufton, of oil brokerage PVM, told the paper "the prospects of a second half-year price rebound have evaporated".
Oil price: Majors braced as $50 barrel looms
A recent renewed decline in the price of oil is gathering pace, with international benchmark Brent crude hurtling towards the $50-a-barrel threshold it last breached in January at the nadir of its year-long slump.
In London the price per barrel was hovering a little above $51 on Monday morning, after it shed close to 2.3 per cent following a similar fall in New York. It is now more than 25 per cent below the peak of its spring recovery in May and is firmly entrenched in bear market territory, with many predicting a continued slide.
The Wall Street Journal said the latest selloff followed another round of data showing a persistent supply glut, with US producers continuing to increase output and, crucially, a significant decline in manufacturing activity in China. The country is the second-largest consumer of oil in the world and the news is damaging to the outlook for demand, which needs to remain sky high to justify excess production from Opec countries and the US shale industry amid a bitter turf war.
As the FT notes, the falls come on the back of a painful week for oil exploration majors, with the likes of BP, Shell, ExxonMobil and Chevron reporting substantial declines in profit and the withdrawal of billions of dollars' worth of projects.
The industry is bracing for prices to remain low. Michele Della Vigna, co-head of European equity research at Goldman Sachs, has told CNBC that by 2020 it sees oil remaining around $50 per barrel, well below current projections of prices recovering to around $70 and a worrying sign for big oil companies. The World Bank recently said it still expects the price to recover this year and be above $70 by 2020.
Of course, for consumers, plummeting oil is good news and it is already beginning to bring down the price of fuel at the pump. According to the RAC, depending on a number of factors, there is a chance the UK could again see a litre of petrol go below the £1 mark if oil prices slip back below $45.