Reasons not to expect stable growth of oil prices

Though the continued recovery in oil prices have lifted Brent close to $50 per barrel, analysts of British economic research and consulting company Capital Economics leave end-2016 forecasts for both Brent and WTI at $45 per barrel.

There are three main reasons for such projections, Julian Jessop, head of commodities research at the company said in a report obtained by Trend.

The most recent gains in oil prices have largely been due to disruptions to supply – notably in Canada, Venezuela and Nigeria – that should prove to be temporary, Jessop said in the report.

These disruptions, according to the economist, are large enough that the rebalancing in the market expected in the second half of the year may already be happening.

However, prices could quickly drop back again once at least some of this supply comes back on stream, he said, adding that in the meantime, global stocks remain ample.

The second reason, according to Jessop, is that oil prices are now back at levels that are high enough to suggest that the slide in US drilling activity and production will come to a halt soon, and could even partially reverse. This would delay the rebalancing of the global market that is necessary for oil prices to stage a more sustainable recovery, he believes.

And third, Jessop said, the turn in oil prices removes another excuse for the US Fed (Federal Reserve System) not to raise interest rates again soon, both by easing the pressure on US producers and by lifting expectations for inflation back above the Fed’s 2-percent target.

Further tightening in US monetary policy – whether next month or later in the year – would likely to lead to renewed appreciation of the dollar and remove the support, that weakness in the US currency has recently provided to commodities in general, including oil, Jessop said.

Overall, Capital Economics does not expect oil prices to rise further next year as the market rebalances due to more than just temporary factors.

Company’s end-2017 forecasts for both Brent and WTI are $60 per barrel.

Oil prices advanced Friday, on track to end the week higher as traders continued to focus on the prospect of supply disruptions, the Wall Street Journal reported.

Brent crude rose 0.7 percent to $49.14 a barrel on London’s ICE Futures exchange. On the New York Mercantile Exchange, WTI futures were trading up 0.7 percent at $49.02 a barrel.

Source: Trend