Oil prices will average around mid-50s one year from now: Sammy Six

Interview with senior oil analyst at S&P Global Platts

With crude oil prices slipping nearly 20 per cent from their peak levels, Singapore–based Sammy Six, senior analyst at S&P Global Platts tells Puneet Wadhwa the market dynamics are luring traders and market participants with an incentive to store now and sell later. Edited excerpts:
 
What explains the crude oil price fall?
 
Prices declined since the Organization of the Petroleum Exporting Countries (Opec) and non-Opec countries decided to roll over the output cut agreement in May. The market had already priced in an extension due to supporting chatter from Saudi Arabia and Russia in the weeks leading up to the agreement. Instead of increasing, prices fell when Opec and non-Opec announced their decision, due to disappointment that the group did not cut more or include more non-Opec producers. There’s also worry about the group not talking of a clear exit strategy.

 

Second, rising supply from Libya and Nigeria, both exempt from any quotas, as well as from the US, are contributing to the bearish sentiment. Iraq is not complying to the same extent as its peers and its production rose in May, reports suggest. US crude inventories are not declining as quickly, while stocks of refined products keep swelling due to record high refinery runs.
 
Are speculators driving down prices?
 
The market structure is still in contango (a situation where the futures price is higher than the spot price), providing traders and market participants with an incentive to store now and sell later. This is reflected in high global levels of floating storage, which have now hit their 2017 record high, including in Singapore. Demand growth is also uncertain in non-Organisation for Economic Co-operation and Development (OECD) countries; plus, the US driving season has been disappointing. A certain level of herd mentality in the paper market can also explain why prices have declined so sharply, as net short positions are accumulating in the absence of more substantial action from Opec and non-Opec.

 
Where do you see oil prices and demand (Brent and WTI) averaging out over the next one year?
 
Platts Analytics/PIRA forecasts Brent at $55 by December 2017 and $57 by June 2018, and WTI at $53 and $56 for the same months. Our forecasts have been revised down, given increasing supply from Libya and Nigeria, as well as lower demand in the US and the European Union (EU). However, we do think prices will average around the mid-50s in one year from now, as the Saudi strategy to drive down inventories is working, just more slowly than originally anticipated, while demand growth looks strong.

 
How do you see Opec respond to these developments?
 
Opec has to make a choice on whether it wants to stick to its current policy of a slow rebalancing or opt for deeper cuts and force the market into backwardation, which is not ruled out. The latter option would likely see prices rise but lead to structural loss of market share, as US shale producers would ramp up production even more.
 
What are the key risks for the oil markets over the next one year?
 
The key risks in the medium term include a military confrontation between Saudi Arabia and Iran over Qatar, with Turkey possibly joining in the hostilities. This is unlikely but would throw oil markets in disarray. Other risks on the supply side would be continued strong growth by Libya and Nigeria, which at some point could result in them getting a quota, or slipping compliance from current high levels as summer demand eats into Gulf countries’ export potential. 

 
How are the oil markets looking given economic data coming from major oil consumers, like India?
 
Well, on the demand side, all eyes continue to be on China and India, especially the latter, which is now the fastest growing crude oil consumer in Asia. Low crude oil prices have stimulated both countries to import strongly in order to build up their strategic petroleum reserves (SPRs) but it is not clear to what extent imports actually reflect consumption growth.
 
West Asian refineries are exporting increasing volumes of refined products as well, to offset a decline in revenues from cutting production (for example diesel from Saudi, fuel oil from Iraq, etc). This is further contributing to swelling product inventories, which at some point will have a spillover effect in the crude market.

 
Will there be a supply glut over the next 12 months if demand doesn’t pick up?
 
A supply glut in crude oil is unlikely but increasingly possible on the product side. Saudi Arabia is supposedly cutting its exports to the US from June onwards; so, we expect a relative speeding up of the decline in US stocks in the coming months, which would support prices.