Oil at US$130 per barrel may be seen as a flight of fancy, but that’s exactly what a prominent oil analyst is predicting.
At a time when Wall Street giants such as Goldman Sachs have been forecasting US$32 oil, Emad Mostaque, of London-based consultancy Ecstrat, says we could be seeing oil prices leap towards the elusive three-digits.
But his call is so controversial that even his own colleague JP Smith disagrees with him.
“Emad and I have both been long-term bears on oil prices, but have recently parted company as he has become much more bullish,” Smith wrote in a report earlier this week, noting that he is “tempted” to predict oil at US$30.
Last year Mostaque had been bearish on oil, long before the commodity fell in November, but he has changed his mind as he believes the lower prices would stimulate demand in both developed and emerging markets. Staggering capex cuts by oil majors will also come home to roost, especially as the industry has to contend with natural production declines of around five to six per cent each year.
“With demand increasing and cheap supply available decreasing as exploration is cut the marginal barrel should be more expensive now than since 2011,” Mostaque said in an email, adding that he does not expect prices to stay at US$130.
“The shape of the curve should backwardate as we grind through excess inventories (which look eerily reminiscent of the missing barrels of 1999) and geopolitical risk is higher now than any time in the last decade with spare capacity at multi year lows.”
West Texas Intermediate for December delivery had slipped 33 cents to US$47.57 on Wednesday morning.
Mostaque may be one of the few ultra-bulls in the depressed oil market, but he is joined by legendary investment manager Jeremy Grantham, who also expects oil prices to triple within a few years, as U.S. fracking production starts to peak.
While not as bullish as Mostaque, RBC Capital Market’s global head of commodity strategy Helima Croft believes that Saudi Arabia’s budgetary pressures could force a regime change that could trigger a change in its oil policy. The kingdom saw its sovereign rating cut by Standard & Poor’s recently on a ballooning deficit, a war in Yemen and the compulsion to keep handing out expensive perks and subsidies to its citizens.
The autocratic nation could see its US$760 billion reserves wiped out in five years unless it reins in spending, the International Monetary Fund warned. But reining in spending could trigger social discontent.
“If there were a sudden switch at the top, change would appear quite likely in light of the policy divisions that have surfaced in recent months,” Croft wrote in the report.
“Given the overarching importance of oil to the Saudi state, we believe the current oil strategy would likely be subject to at least heightened scrutiny, and potentially a reversal under a new regime.”
A two-million barrel per day cut by Saudi Arabia and its OPEC allies could push crude oil prices up to US$70 range, Croft said.
Sanford C. Bernstein & Co. analysts subscribe to the theory that oil prices would move up to US$80 per barrel in the long-term.
Bernstein analyst Neil Beveridge believes the current price decline is similar to the 1986 crash when oil fell 50 per cent after OPEC raised production.
“We believe however that unlike the 1980’s, the price recovery will be stronger given fundamental differences in market conditions,” Beveridge said in a note, adding that OPEC’s spare capacity is less than three per cent compared with 15 per cent in 1986.
Secondly, non-OPEC supply primarily from North American shale basins is far more elastic to pricing than in the ’80s from the North Sea and Alaska. Subdued cost deflation and the large role played by liquid futures market could also spur a recovery.
“While prices are unlikely to test triple digit levels for the next few years, we believe there could possibly be a price recovery to be played in the second half of 2016, if demand turns out to be stronger than consensus view and inventory level starts to decline,” Beveridge said.
| SPOT THE OUTLIER: ANALYSTS’ PREDICTIONS ON OIL PRICE |
| Firm |
Analyst |
As Of |
2016 |
2017 |
2018 |
| Ecstrat |
E. Mostaque |
11/01/15 |
130 |
| Business Monitor International Ltd |
D. Snowdon |
10/29/15 |
53 |
53 |
— |
| BNP Paribas SA |
H. Tchilinguirian |
10/29/15 |
56 |
66 |
— |
| Toronto-Dominion Bank/Toronto |
B. Melek |
10/29/15 |
52 |
— |
— |
| Societe Generale SA |
M. Wittner |
10/27/15 |
49.4 |
65 |
67.5 |
| Lloyds Bank PLC |
C. Paraskevas |
10/21/15 |
61 |
75 |
— |
| Commerzbank AG |
E. Weinberg |
10/19/15 |
59 |
— |
— |
| BMO Capital Markets Corp/Toronto |
R. Ollenberger |
10/19/15 |
52.5 |
55 |
65 |
| Westpac Banking Corp |
J. Smirk |
10/16/15 |
47 |
54 |
64 |
| Capital Economics Ltd |
T. Pugh |
10/13/15 |
53 |
— |
— |
| LBBW |
F. Klumpp |
10/12/15 |
50 |
— |
— |
| DZ Bank AG Deutsche Zentral-Genossenscha |
A. Herlinghaus |
10/08/15 |
42 |
— |
— |
| Norddeutsche Landesbank Girozentrale |
F. Kunze |
10/02/15 |
57 |
— |
— |
| Itau Unibanco Holding SA |
I. Goldfajn |
10/01/15 |
48.4 |
50.3 |
50.9 |
| Danske Bank A/S |
J. Pedersen |
09/29/15 |
58 |
— |
— |
| Prestige Economics LLC |
J. Schenker |
09/28/15 |
58.25 |
58 |
— |
| Natixis SA |
A. Deshpande |
09/23/15 |
45.3 |
55 |
67 |
| Citigroup Inc |
E. Morse |
09/23/15 |
48 |
60 |
70 |
| RBC Capital Markets |
G. Pardy |
09/18/15 |
57 |
— |
— |
| Barclays PLC |
M. Cohen |
09/14/15 |
59 |
— |
— |
| Intesa Sanpaolo SpA |
D. Corsini |
09/02/15 |
60.5 |
71 |
74 |
| Standard Chartered Bank |
P. Horsnell |
08/27/15 |
58 |
72 |
88 |
| Santander UK PLC |
J. Kenney |
08/26/15 |
52.7 |
57 |
59 |
| Raiffeisen Bank International AG |
H. Loacker |
08/18/15 |
59 |
67 |
77 |
| CIBC World Markets Corp |
K. Spector |
08/12/15 |
62.5 |
— |
— |
| UniCredit Markets & Investment Banking |
J. Hitzfeld |
08/04/15 |
59 |
— |
— |
| Cantor Fitzgerald LP |
B. Carpenter |
07/30/15 |
62 |
70 |
— |
| Source: Bloomberg |