Market Overview:The positive trend in oil prices continues this week

By Eithne Treanor

The positive trend in recent weeks continued with the price of Brent crude at its highest for the first time this year. While excess supply may be leaving the market, a weaker US dollar and signs of strength in the Eurozone were also helping to build optimism. In early trading on Friday, Brent crude was priced above US$60 with WTI above US$52 a barrel.

Not everyone is so optimistic on the upward route of the oil price. The market started the week reading a report from Citigroup that stated this was just a “head-fake” claiming WTI oil could drop to as low as US$20 a barrel in the short term as the investment bank lowered its forecast for crude.

Citigroup’s global head of commodity research Ed Morse said that shale production in the US is still on the increase, with Russia and Brazil continuing to pump at record levels. The Middle East producers have been giving discounts to Asian customers to remain competitive on the market and more oil has been put in storage in recent months.

Citibank is not expecting a U or V shaped recovery curve and warned the market that the recovery we are now experiencing may be short lived. The report anticipates a W-shaped recovery where the lower price may take some oil off the market only to see a second dip following a positive price response.

Citibank said it anticipated an average Brent price for 2015 around US$54 a barrel, and adjusted its 2016 price forecast to US$69 a barrel. Morse also cautioned that the changing shale environment would make things difficult for OPEC “to return to its old way of doing business.”

The market paid little attention to the Citibank report this week and looked at better economic performance in Europe, especially in Germany as a positive demand indicator. A report from the European Commission’s statistics bureau Eurostat, saw growth in the Eurozone economy of 0.3 per cent in the second half of 2014.

This was better than analyst expectations and due to a possible combination of cheap oil, a weaker euro and the quantitative easing programme led by the European Central Bank. Growth in Germany led the way at 0.7 percent with Italy and France showing smaller signs of growth.

The unemployment rate in France remains unacceptably high and political instability in Greece and its role within the Eurozone compounded the situation.

Bank of America Merrill Lynch said the share of energy consumption as a percentage of global GDP is now down to just 3.7 per cent, the lowest level since 2002. The medium term oil outlook cautioned, “spare global production capacity is relatively low.”

The bank said that an oil market that “balances itself” has not existed in decades, “so short to medium-term price uncertainty is the highest in years.” The bank said that the falling oil price oil was “largely the result of a surge in US shale oil output and a subsequent Saudi supply policy change.”

Looking ahead over a 5-year period, the bank said the price for Brent crude was likely to remain in the US$60 to US$90 average trading range.

The report also addressed three “unknowns” that might impact the future of the industry, citing Saudi Arabian policy, demand response to falling prices and how technology will impact the global cost curve under a lower price regime. Currency wars and geopolitical uncertainty should also be considered.

OPEC’s February monthly oil market report was optimistic on increased demand for 2015, with expectations of growth in oil demand at 1.17 million barrels a day. The report said it expects demand to pick up in the US as well as China and India.

This week the US Commerce Department said retail sales excluding automobiles, gasoline, building materials and food services were slightly higher than last month.

OPEC’s report stated, “recent data from these countries suggests remarkable oil demand figures compared to a year earlier. Looking ahead, in China and India, transportation fuels are the main contributors to forecast oil demand growth.”

The report remains cautious on growth in Asia and in Europe but concludes that in light of the improvement in economic growth as well as crude oil market developments, “the forecast for global oil demand growth may be subject to further upward revisions as the year progresses.”

The International Energy Agency said it expects the market sell off to come to an end soon and rebound. In its monthly oil report, the agency said that the sell-off was having an impact and while a price recovery “may not be imminent, but signs are mounting that the tide will turn.”

The IEA reduced its US production 2015 forecast by 75,000 barrels as drilling permits and rigs decline. It also cut its Canadian production forecast by 95,000 barrels a day.

The IEA elected its new executive director this week, appointing its chief economist Fatih Birol to succeed Maria van der Hoeven when her term expires at the end of August. Birol, a Turkish national and an industry expert who once worked at OPEC has been at the IEA for the past 20 years.

Birol has been a member of the UN Secretary-General’s High Level Group on Sustainable Energy for All and has been described by Forbes magazine as one of the “most influential people on the world’s energy scene.”

Saudi Arabia’s state news agency reported that the country’s oil minister, Ali al Naimi met separately with officials from Russia and Algeria to talk about the state of the oil market.

The chairman of Gazprom, Viktor Zubkov was in Riyadh this week for talks about Saudi-Russian cooperation on energy projects and production. Few details were disclosed. Algeria has been petitioning Saudi Arabia about the fall in the oil price in recent months.

Oil companies continue to be concerned about the uncertainty in the market. The French energy giant Total reported a 62 per cent fall in fourth quarter profits this week to US$4.24 billion with revenue down 6 per cent.

The company imposed a hiring freeze and estimates it will reduce headcount by 2,000 jobs by the end of 2015 as well as cutting investments in the North Sea and in West Africa. The performance of the company’s exploration and production unit was down 48 per cent.

Analysts say the company is still one of the better performing in the sector having managed to replace 100 per cent of its reserves from 2014. More disappointing news came from Shell as the Anglo-Dutch oil company announced its withdrawal from a US$6.5 billion petrochemical project with Qatar Petroleum.

The company blamed the “current economic climate prevailing in the energy industry,” and the CEO Ben van Beurden says he expects supply to outpace demand this year if prices remain low.

One of America’s key shale producers, Apache Corporation reported a fourth quarter loss of almost US$5 billion. The company said it would cut capital spending and lower its rig count by 70 per cent and look to sell assets in Australia.

The price of oil might be seeing a recovery this week, but the market remains volatile and traders and investors are nervous. Capital spending in the industry has certainly declined in recent months, but few analysts will hazard a guess as to expectations for the rest of the year.