Oil prices likely to remain depressed, say analysts

A Citgo oil refinery in the US state of Texas. OCBC Bank economist Barnabas Gan said the risk of oversupply continuing into the year "is very real, on the back of fresh United States crude oil exports and Opec's reluctance to taper production". The B
A Citgo oil refinery in the US state of Texas. OCBC Bank economist Barnabas Gan said the risk of oversupply continuing into the year "is very real, on the back of fresh United States crude oil exports and Opec's reluctance to taper production". The Brent benchmark fell below US$29 and the West Texas Intermediate crude ended below US$30 last week, hitting 12-year lows.PHOTO: BLOOMBERG

With Opec not cutting output, forecasts have been lowered, given dire market conditions

The unremitting slide in crude oil prices will likely continue for some time to come, say analysts.

The Brent benchmark fell below US$29 and the West Texas Intermediate crude ended below US$30 last week, hitting 12-year lows and extending a rout that has been under way since June 2014.

Oil prices have tumbled some 35 per cent in the past year, on the back of an unabating glut of supply, amid muted global demand led by the economic slowdown in China.

 
 

OCBC Bank economist Barnabas Gan, in a report last Wednesday, said oil prices are expected to "remain pressured at below US$40 a barrel" for at least the first half of the year.

"The risk of oversupply into 2016 is very real, on the back of fresh United States crude oil exports and Opec's reluctance to taper production," he said.

Mr Gan also said that oil could drop to as low as US$20 a barrel, although a "rebalancing environment" is likely to come into play for the second half of the year that will lift the price to US$50.

Banks such as Barclays and Morgan Stanley recently lowered their forecasts for oil prices, given the dire market conditions.

Barclays expects Brent to average US$37 a barrel this year, down substantially from its previous forecast of US$60, citing the "complete breakdown of Opec cohesion" after the Organisation of Petroleum Exporting Countries last month declined to cut output, while Morgan Stanley says crude will average US$47.50 a barrel for the year.

Standard Chartered even raises the drastic possibility of oil prices reaching US$10 a barrel in a report last Monday. "Given that no fundamental relationship is currently driving the oil market towards any equilibrium, prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices, including the US dollar and equity markets," said the bank.

"With Saudi Arabian oil spokesmen remaining relatively quiet as prices fall, and with high inventories and the expectation of more supply blunting any potential market concern over geopolitical tensions, the sources of short-run support are fairly limited.

"In the extreme case, the only definition of a floor would come when the entire market felt that prices had undershot too far."

Still, Mr Anthony Starkey, manager of the oil analytics team at Platts' analytics and forecasting unit Bentek Energy, believes the oversupply will be corrected in time, "as very little fresh capital will be invested in drilling for oil at US$30".

The protracted weakness in oil prices has been keenly felt across the energy sector worldwide as oil majors and national oil companies slash capital spending.

Offshore and marine firms in Singapore have taken a hit as well. In the past two weeks alone, conglomerate Keppel Corp, whose rig-building arm ranks among the world's largest, has lost about $3.04 billion in market capitalisation to reach $8.81 billion, while Sembcorp Marine has seen $762.5 million wiped off its market value to $2.89 billion.

Both groups, which have not received a single rig order in the past year, have reported lower bottom lines amid customer delays, while some smaller players are faced with falling charter rates and utilisation, coupled with growing debt levels.

As a net oil importer, Singapore's broader economy, however, is poised to benefit from lower oil prices, said UOB senior economist Alvin Liew.

A spokesman for the Ministry of Trade and Industry (MTI) told The Straits Times that while the marine and offshore sector here is being weighed down by the weakness in oil prices, businesses in general have benefited from lower utilities and fuel-related costs.

Households in Singapore also stand to gain in a low oil price environment, which will help dampen the domestic prices of oil-related items, including private road transport and utility costs.

"Nonetheless, as there remains considerable uncertainty over the outlook for global oil prices, MTI will continue to closely monitor developments and assess the impact of oil price changes on the domestic economy."

Still, Mr Liew said that with the sustained downward pressures on the prices of major commodities, including oil, and manufactured products, Singapore could well continue to see a weak inflation trend.

OCBC Bank economist Selena Ling said: "If we see a structural break in crude oil prices towards US$20 per barrel, there could be leeway for another easing in monetary policy, although this is not the baseline scenario yet."

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A version of this article appeared in the print edition of The Straits Times on January 18, 2016, with the headline 'Oil prices likely to remain depressed, say analysts'. Print Edition | Subscribe