Granted, prices had risen as high as $39 per barrel earlier in the week following news of a widening of the rift between Saudi Arabia and Iran following Saudi Arabia’s execution of a Shiite cleric, but the sheer size of current production from both OPEC and non-OPEC countries, exacerbated by the imminent return of Iran to the international fold and lacklustre global growth leaves little room for any other result.
Indeed, Natixis, in its oil market outlook for 2016 predicts that, based on current fundamentals, markets should remain in excess until at least the end of 2016. It sees production averaging well above 1.1m barrels per day for the year.
“With this as the base of our analysis, we are looking at global crude stock builds of well over 800-900m barrels by the end of 2016,” the firm said.
As a result of this, Natixis says it expects the price of Brent to remain under pressure in the first quarter at around $38 per barrel, after which it expects it to rise to an average of $57 per barrel for the fourth quarter.
“For the year as a whole, Brent should average $47.8 per barrel,” it writes, but adds: “Given the amount of excess in the market, and the continued resilience shown by non-OPEC oil producers alongside the OPEC market share strategy, we could even see oil prices dipping well below $30/bbl for a brief period but then they are unlikely to stay that low for long.”
While Natixis admits that the ongoing tensions between Saudi Arabia and Iran “could add a significant geopolitical risk premium”, this would only become a factor should the tensions between the two intensify to a point where it disrupts supply from the region.
And, it adds, while Iran and Saudi Arabia together contribute over 14m b/d of crude supply, “In our view both will be very careful in not disrupting these flows as they depend significantly on crude revenues.”
According to the group, the bigger worry in the near term is the continuing movement of crude onto floating storage which will keep pressure on prices.
This movement, also worries Goldman Sachs, which writes in its latest Gobal Opportunity Asset Allocator note: “For oil there are high risks near term that the supply adjustment proves too slow as inventories continue to build and storage utilization nears high levels in the face of a mild winter, slowing EM growth and a potential lift of international sanctions on Iran.
“If surpluses breach capacity we see risk of oil prices reaching cash costs at US$20/bbl.”
As a result the bank recommends selling 3-month calls on oil equities and buying CDX HY calls.