Oil could rebound to US$50 this year, say some analysts

An oil jack in Oklahoma in the United States. Some analysts have turned bullish about oil, citing news that shale oil producers in the United States, faced with earnings losses, have started cutting back their output. Others say there will likely be
An oil jack in Oklahoma in the United States. Some analysts have turned bullish about oil, citing news that shale oil producers in the United States, faced with earnings losses, have started cutting back their output. Others say there will likely be "more pain for oil and gas stocks before prospects brighten".PHOTO: REUTERS

They cite cuts by US shale producers; other analysts say it is too early to buy into sector

It has not been a happy two years for the energy sector, which has seen oil prices slumping to 12-year lows, but it looks like the tide is finally starting to turn.

Prices have been inching up in the past couple of weeks, rising to a high of US$36.90 yesterday after languishing at an average of under US$32 for two months.

The market is taking note - analysts are issuing more bullish forecasts on oil prices, and energy-related stocks are starting to recover some ground.

Goldman Sachs, which famously warned in December that oil will likely fall to US$20 a barrel, now predicts it will rebound to US$40 sometime before July.

Its revised forecast follows one made by JP Morgan in January, when its global head of derivative and quantitative strategy, Mr Marko Kolanovic, told CNBC it would be reasonable to expect oil to climb to as high as US$50 this year, and that US$60 is "quite possible".

Many other forecasters have made similar calls, with OCBC commodity economist Barnabas Gan saying oil will rally to US$50 by the end of the year.

Phillip Futures investment analyst Daniel Ang agreed, saying that while he expects oil prices to remain stagnant at around US$35 for the first half of the year, things could pick up after June, with prices moving up to US$45 a barrel and maybe even hitting US$60.

Mr Ang said his bullishness stemmed from news that shale oil producers in the United States have started cutting back their output as they face earnings losses and the reality that a supply glut is the main reason behind the extended slump in oil prices.

"Should this trend continue, I would think that we will start to see significant cuts to... global supply," said Mr Ang.

IG market strategist Bernard Aw was more circumspect, noting that despite reports of producers saying they would scale back production, the International Energy Agency expects US shale gas and oil production to hit record highs over the next five years.

"This is also consistent with other reports put out by BP and the US Energy Information Administration," he said.

What this means is that there will likely be "more pain for oil and gas stocks before prospects brighten", he added. "In my view, it is still not time to buy into the sector."

Mr Ang said: "I would think that it is slightly on the early side to enter now. A more definite buy signal would come from prices moving higher towards US$45.

"However, if time is on the investor's side, the sector definitely gives good discount buys. In a nutshell, buying now would likely require investors to wait it out before prices really recover higher."

Market punters have begun piling in. Oil and gas-related plays, many of which have recently plunged to levels last seen in 2009 during the financial crisis, began making tentative gains in the past couple of weeks, in tandem with oil's nascent recovery.

Several such stocks were among the top actives yesterday, making big gains. Keppel Corp advanced 13 cents to $5.31 and Sembcorp Marine, which has been rising amid rumours of being taken private, gained a cent to $1.54.

Smaller players also benefited - Ezion Holdings added a cent to 51 cents, Ezra climbed half a cent to 6.9 cents, and Vallianz Holdings edged up half a cent to 4.8 cents.

A version of this article appeared in the print edition of The Straits Times on March 02, 2016, with the headline 'Oil could rebound to US$50 this year, say some analysts'. Print Edition | Subscribe