Wednesday, 22 April 2015

War, hedge funds and China: why oil will hit $100 a barrel

In Oil & Companies News 22/04/2015

It wouldn’t be the first time that oil experts have got it spectacularly wrong when predicting the price of crude.
Goldman Sachs went against the prevailing mood in 2008 when it famously predicted that crude would hit $200 per barrel within months. Instead, oil crashed to levels around $40 per barrel as the global financial crisis punctured world demand.
This time around, the US investment bank decided to follow the consensus view on Wall Street when earlier this year it downgraded its short-term forecast for the price of a barrel to around $40 per barrel.
But instead of falling, oil has rallied strongly. Brent crude now trading above $63 per barrel is up 36pc since reaching its year low in early January. At this rate oil will be back at $100 per barrel by the end of the summer driving season in the US when middle-class America hits the great open roads to visit their ‘Aunt Agatha’ in Pennsylvania.
So why has the short-term outlook for oil changed overnight?
Lower prices have started to filter through to boosting growth in the world’s most advanced economies and with it demand for gasoline, which is once again on the rise.
Here are six reasons why oil is heading back to $100:
The market is tighter than you think: World demand for crude oil is beginning to rebound. After growth in consumption slowed last year the early signs are that demand is beginning to pick up led by developed markets that are responding to a period of lower prices. The Organisation of Petroleum Exporting Countries (Opec) expects demand for oil to grow by 1.17m barrels per day (bpd) in 2015 but this is a conservative estimate. Another 500,000 bpd of crude would erase the current 1.5m bpd surplus in the market. Remove this tight surplus and oil is back above $100 in a heartbeat.
War in the Middle East threatens supply: Gulf countries, which account for a fifth of the world’s oil supplies, are under siege. In Yemen, a shaky Saudi-led coalition is battling to turn the tide on Iranian-backed Houthi rebels with airstrikes. Abdel-Malik al-Houthi, leader of the rebels who are the brink of seizing Aden, is already being described by Iranian media as the “supreme leader of the Arabian peninsula. In the north, Islamic State continues to pose a threat to the Gulf in Iraq. The region, which controls most of the world’s oil is in turmoil and any further escalation in conflict could easily push crude back to $100 per barrel and beyond.
Hedge funds are betting on oil: The vultures of global markets smell a killing and have started to turn bullish once again on oil heading back to $100. Investors have increased their net-long position on West Texas Intermediate (WTI) crude by more than 9pc in the first few weeks of April as the number of traders still betting on a further price collapse dwindles. Oil traders are beginning to turn bullish, which has already pumped up WTI by 36pc in the last six months.
China to unleash massive stimulus: The leaders of the world’s second-largest economy and biggest importer of crude have finally woken up to the dangers of a potentially catastrophic slowdown. The People’s Bank of China started the week by pushing more money into the system by cutting the amount of money that lenders must hold against reserves. Crude oil immediately responded. China will account for roughly two-thirds of Opec’s forecast increase in demand this year and a major push by Beijing to revive growth could easily push oil back above $100.
Barbarians at the gate: Royal Dutch Shell’s game-changing £47bn bid to buy BG Group is a good sign that ‘big oil’ sense that prices could once again be about to turn back towards $100. No one wants to catch a falling knife and Shell have obviously timed their move just at the point when crude prices have started to turn. More takeovers in the industry are expected with BP persistently linked as a target for Exxon Mobil. Such deals would also drag more free cash away from investment into drilling new oil wells and expanding capacity, which eventually can lead to demand outstripping supply.
America’s shale oil revolution is over: The number of rigs working in US oil fields has fallen for a record 19th straight week as drillers continue to cut back in response to the lower prices of the last six months. Although, US oil production if expected to reach a record 9.65m bpd average in 2015 this could represent the high watermark for the industry in North America. Shale oil needs prices above $100 per barrel to grow.

Source: Telegraph