KPMG oil chiefs dare to believe

SOME of KPMG's most senior oil analysts are paddling their feet in the bull pond amid hopes that the recent $US11/barrel three-day rally was a sign of things to come, but others in the group are weary Iran's sanctions and Indonesia's pending OPEC entry could yet throw a spanner in the works of any oil price recovery.
KPMG oil chiefs dare to believe KPMG oil chiefs dare to believe KPMG oil chiefs dare to believe KPMG oil chiefs dare to believe KPMG oil chiefs dare to believe

After the market contagion from Chinese equities helped drive oil benchmarks to six-year lows last month, prices rebounded sharply on speculation of an OPEC production cut, triggering a rally that saw Brent prices soar $US11 in three days in August - the largest three-day gain since 1990.

Prices were then further supported by revised US production data for the first half of 2015 which revealed lower than expected production volumes.

While Brent forecasts have seen a small downside revision from August due to concerns over the end of Iranian sanctions and the possibility of higher production from Saudi Arabia via enhanced oil recovery techniques, analysts maintain their prediction of a medium-term recovery in prices as capex cuts and low spare capacity will support the crude price.

KPMG's UK-based executive advisor, oil and gas George Johnson said in the firm's September Market Update that the late-August price action demonstrated the challenging market conditions participants face as oil prices continue to oscillate around $US45/bbl.

This is particularly the case for the many US upstream players with unhedged physical exposure who will be feeling every bump in the road.

However, despite these rapid price movements, Johnson said that many exploration and production companies would be reluctant to lock in forward production hedges with oil trading at these low levels.

"Many will be hoping the $US11/bbl rally is a sign of things to come," he said.

"Further rhetoric from OPEC on production cuts, or threats to US production, could trigger another upside move, but for such a rally to be sustained over the longer term the demand-supply imbalance needs to be redressed."

The US Energy Information Administration's Petroleum Supply Monthly Report released at the end of August surprised market participants with a significant reduction in domestic crude oil production.

Further, EIA data for June showed a decline in crude production of 210,000bopd to average 9.3MMbopd for the month.

KPMG's US-based manager advisory for market/treasury risk, Thomas Ruck, said the year-on-year production dropping to its lowest level since mid-2012 was the first sign of a response by oil producers to the current low price environment.

"A continuation of this trend over coming months could create a floor for crude prices in the near term," Ruck said.

"If the crude market can weather the upcoming refinery turnaround period and if a cold winter can bring distillate inventories back to normal levels by next spring, there could be some upside to US oil prices in 2016."

Bears' warnings

However, Oliver Hsieh, KPMG's Singapore-based associated director, commodity and energy risk management for ASEAN, put the brakes on such enthusiasm, warning the likelihood that sanctions on Iranian crude exports being eased would hit the industry like a sledgehammer.

"Global crude supplies will be amplified, compounding downward price pressure," Hsieh said.

"Moreover, regional demand competition will intensify, with Asia hosting four of the five largest consumers of Iranian crude."

Southeast Asia's largest energy consumer, Indonesia, is also considering re-joining OPEC, despite 2014 oil production hitting its lowest level since 1969.

"Facing an acute supply-demand imbalance and lacking adequate downstream infrastructure, Indonesia has evolved as an energy importer," Hsieh said.

"OPEC could be the vehicle Indonesia uses to stabilise local energy prices and secure downstream investment."

The latest short-term oil flat price came as no surprise to KPMG's Switzerland-based deputy head of regulatory risk and management and commodities trading Christian Kurz, who noted volatility had picked up as market participants "remain unsure about when these lower prices will stimulate global demand".

The market also seems unclear whether larger players have "suffered enough pain" to see a need to trim production, Kurz warned.

"The medium-term outlook remains weak," he said.

"Bullish positions are very risky and participants should carefully watch the late August low.

"A re-test of the August low cannot be ruled out and a break of these levels would indicate a further price decline. Long-term investors may be hesitant to commit, and may wish to wait until the long-term picture clearly indicates a bottom formation."