Oil at $40 leaves forecasters poised to play catchup again

Forecasters have spent more than a year playing catch-up with the oil price. After Opec effectively abandoned crude-output limits last week, another round may be overdue.

As Brent crude futures crashed through $40 a barrel yesterday for the first time in almost seven years, analysts were still predicting average prices of $51 in the first quarter, according to data compiled by Bloomberg.

With Iran planning to boost output by about 500,000 barrels a day, record oil stockpiles continuing to expand and El Nino damping demand for heating fuel in the Northern Hemisphere, there are several reasons to expect such a recovery isn’t imminent.

“Banks have continuously been stripping their numbers down since July-August, and I think that will continue,” said Abhishek Deshpande, an analyst at Natixis in London.

He forecasts an average of $41 for Brent in the first quarter.

“People want to go long, but timing wise I think they have to wait more before we can say it’s hit bottom.”

Brent crude will average $51 in the first quarter, according to the median estimate of analysts surveyed by Bloomberg.

That compares with the current price of $40.79 for the January futures contract on the ICE Futures Europe exchange.

West Texas Intermediate, the US benchmark, will trade for $48 in the period, according to forecasters, compared with $37.88 yesterday on the New York Mercantile Exchange.

The consensus for the first quarter may be more bullish than current prices.

That’s because projections for the year ahead still show the crude surplus diminishing as investment cuts outside the Organisation of Petroleum Exporting Countries curb supplies and global oil demand increases, Mr Deshpande said.

Yet, that might not be enough to give prices much of a boost as storage tanks around the world fill up, he said.

“I can see the reasons people are bullish,” said Mr Deshpande, because “physical balances will get tighter as we go to the end of 2016,” but the economics of storing oil will also influence prices.

The Energy Information Administration yesterday trimmed its US crude production outlook for next year.

The agency decreased its 2016 forecast by 0.1% to 8.76 million barrels a day.

America’s oil drillers have sidelined more than half the country’s rigs since October as prices have tumbled.

The number of active oil rigs in the US fell by 10 to 545 last week, the least in more than five years, according to Baker Hughes.

Meanwhile, oil prices should recover in 2016, regardless of the price of Brent’s short-lived dip yesterday below $40 a barrel, Capital Economics said.

It said the price slide is a further damning verdict on Opec’s “bungled communications” after its meeting last Friday.

Capital Economics said it was never likely the group would agree to cut output to boost prices.

Instead, any recovery next year will depend on reductions in non-Opec supply and on stronger demand.

“On this basis, while we are lowering our end-2016 forecast for Brent from $60 to $55, we continue to expect oil prices to stage a partial recovery next year,” it said.