DBS Bank takes contra call on crude

Expects 'V' shape recovery taking oil back to $100 level

With crude oil prices falling about 60 per cent since June last year, most analysts say the trend is likely to hold for a while. However, taking a contra call, Singapore-headquartered DBS Bank has said growing demand for the commodity in Asia would trigger a recovery in crude prices.

“Today’s supply-demand mismatch seems likely to be absorbed in a year, if not sooner. Prices are reasonably expected to return to $100/barrel, the average for the past three years. But if markets expect prices to return to normal in a year, they will put them there today. After all, at $100/barrel a year from now, crude oil will imply 210 per cent returns. Nobody expects that from equities.”

It said at a time when supply was increasing, a fall in demand was behind the correction in prices, adding supply wasn’t that in excess to bring about a 60 per cent drop. The bank expects demand in Asia to be absorbed, saying, “Shale oil supply from the US will see decelerating growth now.” The projected fall in demand in the EU and Japan and the overall slow growth in demand in the US would be outpaced by the rise in Asia in coming years, it said.

A V-shaped recovery didn’t sound as far-fetched as it did last year, the bank said. Demand in Asia had absorbed 60 per cent of the surge in US supply, it said, adding this year, it would account for 135 per cent of the supply.

Quoting the US Energy Information Administration, DBS said by 2017, US shale supply would stop rising and by 2020, the supply would fall.

“Once prices stabilise, companies in India expect an increase in the demand for petroleum and derivative products such as polymers, petrochemicals, raw materials for synthetic yarns, chemicals and solvents,” said a chemical indenting agent supplier.