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Oil prices are not high enough to encourage
sufficient production, says Barclays.

Oil price to reach $85 by 2019: Barclays

LONDON, July 20, 2016

Barclays expects oil prices to reach $85 by 2019, a year sooner than previously forecast, the global banking and financial services company said in a new report.

Few dispute that oil prices will eventually rebound, but the conditions and timing remain highly uncertain, noted the report titled “Affirming ‘Upward Bound’”.

“Since our previous analysis of medium-term prices (October 2015), geopolitical developments, a prolonged price downturn, and several more months of data justify a reassessment of our assumptions.

“We reiterate our view that prices are not high enough to encourage sufficient production even in a low demand scenario.

“The base and low case demand forecasts still result in prices in excess of the current futures curve. As prices rise, we suggest the Dec ’17-Dec ’18 WTI spread will narrow. Since we expect prices to dip in Q3, lower forward prices present buying opportunities,” said Barclays.

“On the supply side, the one-two punch of capex reductions on current and future production is likely to create a shortfall in production over the coming years, and we show evidence that decline rates are already accelerating.

“From 2013 to 2017, new project starts fall 40 per cent. The volumes from those new starts for 2017 are lower by 50 per cent. We have slightly pared our demand growth estimates but continue to expect base case demand growth of 1 million barrels per day on average to 2021.

“India’s growth accounts for a quarter of global demand growth for 2016-21, outpacing China. Non-OECD demand becomes more elastic due to retail price policy changes that allow a more fluid pass-through.

“Declining inventories, low spare capacity, the externality of low prices on geopolitical unrest, and the deterioration in liquidity, among other factors, are likely to create more volatility in the future. Shale makes the supply stack at least 20 per cent more responsive to price changes by 2020, but is not a replacement for global production declines, or for Saudi spare capacity. Retail price policies in non-OECD countries, likewise, improve the demand elasticity, but their permanence remains unclear as prices rise again.

“Incremental capex will favor shale, meaning developed markets stand to benefit more than emerging ones. Two important downstream themes emerge: North America’s import dependency increases and then decreases, and production quality becomes less and then more “dumb-belled”, resulting in a wider, then narrower LLS-Mars spread,” Barclays said.

CROSS-CUTTING ISSUES

“The oil market is on the cusp of a rebalancing within the next year, and we reiterate the thesis that we outlined in October 2015,” Barclays said.

“In Upward Bound, we noted that futures prices from 2017-20 are far below levels that will dispatch sufficient price-sensitive supply to meet even the lowest realistic demand scenario.

“Those forecasts remain intact, but the question we turn to in this Special Report is not if prices will go higher, but when, to what level, and under what circumstances. We continue see a rocky road to recovery, even if the average annual average price is expected to increase. In the short term, sentiment has dramatically shifted in the first several months of the year, and recently a series of significant unplanned outages and still robust demand have accelerated that process,” Barclays said. – TradeArabia News Service




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