Analysts back turtle approach

AS MUCH as oilers would love crude prices to shoot up, analysts are saying slow and steady will win the race for longer-term price sustainability, otherwise next year will only see more tears.

Analysts back turtle approach

"The pace of the path higher is paramount to the durability of the rally," RBC Capital Markets' commodity strategist Michael Tran said in a client note yesterday.

"We caution that a swift and sudden surge higher through the balance of the year could set the stage for downward pressure in 2017 as US producers become price agnostic once hedge ratios are shored up."

Accordingly, RBC believes West Texas Intermediate and Brent will average $US51 and $53/barrel through the rest of 2016 before increasing to $56.50 and $59/bbl next year, respectively.

While some, like Bank of America Merrill Lynch, have suggested that the market share battle has ended, RBC argues that such battles "never die but instead evolve".

"The now defunct policy centred on competing on price and volume, but going forward, countries will prioritise captivity over competition," Tran said.

By that, he meant a strategy to create a captive market, which has been underpinned by capturing market share, offering oil for loan deals and strategic arrangements, such as the United Arab Emirates, which runs one of the world's largest sovereign wealth funds, collaborating with India on energy security and strategic issues.

Tran said that signs of improving fundamentals and sentiment were apparent, he warned that he market was still dogged by reminders that "the rebalancing act is lengthy and tumultuous rather than linear".

"While we remain constructive, prices will likely grind rather than gap higher," Tran said.

The precarious nature of the situation was further highlighted yesterday when the International Energy Agency said OPEC oil supply was at an all-time high last month while demand growth had fallen to a four-year low in the third quarter of 2016.

The IEA's newly released Oil Market Report for October revealed global supply jumped by 600,000bpd last month, while non-OPEC supply was up nearly 500,000bpd on higher Russian and Kazakh flows.

The IEA forecast demand to expand by 1.2MMbopd this year, with a similar gain expected in 2017.

While a corner of the market remains sceptical on follow-through of OPEC's recent announcement to cut production, RBC noted that, at a minimum, the cartel has bought itself a price floor near $45/bbl at least until the group meets again late next month.

"More importantly, the watershed announcement came at a pivotal time because it acts as a key counterbalance to the otherwise bearish supply-driven headlines on the horizon," Tran said.

"Market balances will, on average, ebb in constructive fashion alongside the passage of time, but the near-term upside is clouded by supply-side headwinds, namely potential growth in Iran, rebooting US production, and the ramp-up of the giant Kashagan field in Kazakhstan."

RBC is sceptical that the "wall of crude" from Nigeria and Libya would undercut any collective action, particularly considering Russia signalled its intention to join the deal-making party this week on managing the market.

Besides, Venezuelan production could also drop further heading into the November OPEC meeting, offsetting any gains that Libya and Nigeria might post.

Venezuelan output has already fallen by over 300,000bopd year-on-year on the back of service provider cuts, an inability to import light barrels for blending and absentee PDVSA employees, driven by salary non-payment and safety concerns.

"With China seemingly unwilling to extend further balance sheet, the crisis looks set to deepen and an increasing number of country experts contend that Venezuelan production could dip below 2MMbopd before year-end," RBC said.


A growing series of reports, each focused on a key discussion point for the energy sector, brought to you by the Energy News Bulletin Intelligence team.

A growing series of reports, each focused on a key discussion point for the energy sector, brought to you by the Energy News Bulletin Intelligence team.


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