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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Analysts See Oil Prices “Lower For Longer”

Oil Barrels

The oil industry had hoped this would be the year the prices finally start to firm up. But the industry is having to once again get used to the idea of “lower for longer.”

For the second month in a row, major investment banks are lowering their price forecasts. A Wall Street Journal survey of 14 investment banks finds an averaged predicted price for WTI at $52 per barrel for 2017, a decline of $2 from the same survey in May. The banks also now see WTI averaging $55 per barrel in 2018, again, down $2 from the May results. “Disappointment about the slower-than-expected market rebalancing will keep prices depressed well into next year,” Carsten Fritsch, an analyst at Commerzbank, told the WSJ.

Goldman Sachs made some headlines when it decided to dramatically lower its oil price forecast for 2017, dropping its prediction by $7.50 per barrel to $47.50. “But this still leaves the question of how did we get it so wrong?” analysts from the bank lamented in a research note Thursday. The investment bank cited higher-than-expected production from Nigeria, Libya and a swift rebound in U.S. shale output. Goldman said it is also getting a little late in the game to hope for inventories to balance by the end of the OPEC compliance period in March 2018. The steady rise in the U.S. rig count kind of bakes in further production increases this year, leaving little time left for inventories to normalize.

At the same time, Goldman says that oil prices could see some gains this year, potentially having recently bottomed out in the low-$40s. There are several reasons to expect some short-term price gains, the bank says: Even if inventories are falling too slowly, they are still falling; there is room on the upside for speculative bets after investors staked out a near record bearish positioning; demand is rising; OPEC could still do more to cut; and price inflation in the shale sector could lead to lower-than-expected production results. Related: Oil Prices Are Set To Post Worst H1 Since 1998

“This leaves us cyclically bullish within a structurally bearish framework: then near-term price risks are now increasingly skewed to the upside while the low velocity de?ationary forces of the New Oil Order are still at play,” Goldman analysts wrote. Translation: Oil prices might move up in the short-run, but shale productivity gains and efficiencies could still keep a lid on prices over the long-term, keeping prices at $50 per barrel.

In addition to Goldman, a slew of other banks lowered their forecasts, including Bank of America, Citigroup, JPMorgan Chase and Societe Generale. Goldman’s $7.50 per barrel reduction pales in comparison to Bank of America, which predicted as recently as April that Brent prices would rise to $70 per barrel by the summer. In a dramatic climb down, Bank of America now concedes that Brent will average just $47 per barrel in the third quarter.

Lower oil prices are dragging down energy stocks. The MSCI World Energy Index, which includes 90 oil and gas companies, saw its value drop for the second straight quarter. Of course, that is entirely due to the decline of oil prices. Bloomberg reports that the 90 companies included in the index have shed $115 billion in value since April. Only 17 of the 90 companies in the index have seen gains in their share prices in the second quarter, so it comes as no surprise that energy is the worst performer in the MSCI World Index.

The industry has become a lot more efficient over the three-year downturn, cutting costs and lower breakeven prices. Nevertheless, their health hinges very heavily on the trajectory of oil prices, which, for now, doesn’t look very encouraging.

With all of that said, oil prices have staged a rally since hitting ten-month lows a little over a week ago. There is dispute over whether or not the gains are sustainable. Dennis Gartman, founder of the Gartman Letter, argued on CNBC that the latest rally is a “dead cat bounce” that will dissipate in the near future. Related: The World’s Largest LNG Buyer Just Completely Reshaped The Market

But others are hoping that the recent selloff had gone too far and that the gains are here to stay. “There is cause to be confident that the long-awaited oil market rebalancing is fast approaching,” Stephen Brennock, an analyst at PVM Oil Associates Ltd., told Bloomberg. However, he conceded that “doubts will linger over the staying power of this rally.”

Michael Cohen, Barclays head of energy commodities research, is a bit more bullish, predicting “severe” inventory declines later this year, which could lead to a more sustained rally above today’s prices.

Still, the sentiment across the analyst community is much more negative than it was a few weeks ago. Everyone has lowered their predictions, expecting oil prices to remain “lower for longer.”

By Nick Cunningham of Oilprice.com

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  • zorro6204 on July 02 2017 said:
    Seems to me the only thing that can be said with certainty about where oil prices are going is that no one knows where oil prices are going. It's been that way since 2014, and I don't see anything changing, all these expert opinions aside. I bet if you graphed the average error of every oil forecast price given in the past three years it would be a near perfect bell curve.
  • Vegas Vinnie on July 02 2017 said:
    $50 average for 2018 would be a BLESSING for non-OPEC and OPEC producers alike!! $42-$46 for the balance of 2017 would be the same blessing. The World is AWASH in oil and there is NO shortage of supply while demand (globally) remains either stagnant or in the beginning stages of retrograde. Libya, Iraq, Iran, U.S. shale, Nigeria, etc. etc. are PUMPING (new record output daily) but "somehow" the price of oil is supposed to set/find/maintain support above $45? $47? $50? $52? The ONLY thing propping-up the price of oil is the "greater fool theory"...the same factor justifying (and having justified) the "tech industry equities". Wake up and quit falling victim to the hookah smoke!!! In an un-manipulated "free market" economy, oil (Brent/WTI) would be at BEST priced in the low $30's!! TIME holds ALL "players" accountable and the Piper has to be paid sooner or later. Let the price go up juuuuusssst long enough for KSA to float their IPO (while the World's producers stand idly by...not) and KSA opens the flood-gates shortly thereafter. Be sure to get into THAT IPO "early".LOL
  • Citizen Oil on July 04 2017 said:
    Does "lower for longer " matter if a profit can still be made? As for the E&P stocks , there has been a systematic algo attack on these stocks for years now. They short the stocks mercilessly and then short squeeze every time there is some good news. This cause a decay of the stock price with every cycle. The stock market was designed for long term investors to "invest" money in companies so they can grow and return dividends and wealth back to the investors and now it a series of computers siphoning money from the market with very little resistance from actual human retail investors. It is disgusting that the SEC and other governing bodies allows this to happen. The crime of the century, and it's legal .

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