Crude stabilises around $45-50, but could it be a false bottom?

Several banks and financial institutions once again lowered their price forecasts for 2015 and 2016, with Goldman Sachs planting $20 a barrel in the market’s consciousness as a possible new nadir.
Nine of the top forecasters monitored by Platts settled in a range of $54-$58 a barrel average for Brent in 2015, and $49.50-$62 for next year.
China’s economic slowdown and manufacturing contraction has become old news across the commodity markets. The new narrative to grab attention was an accelerated drop in US crude-oil production and four straight weeks of decline in its onshore oil-rigs count, reversing increases through end-July and August.
The US Energy Information Administration (EIA) revised down its US crude-oil production forecast to 9.22 million barrels per day for 2015, and 8.82 million for 2016, with some analysts saying at the current rate of output decline, next year could see a far steeper drop, of 850,000b/d.
The latest weekly data showed production had slipped nearly 500,000b/d from June’s peak of 9.6 million.
A flat WTI (West Texas Intermediate) forward price curve even two years out forebodes more cuts in US upstream capital spending, as hedges begin to roll off.
Meanwhile, the second round of semi-annual bank loan re-determinations for the smaller US independents showed most managing to maintain their borrowing base, contrary to fears of massive deleveraging.
Nevertheless, analysts warned that many of the hardest-hit smaller operators were inching towards restructuring or even bankruptcy, which would continue slowing down the drilling of new wells, shrinking production the rest of this year and into 2016.
The International Energy Agency (IEA) suggested non-Opec (Organisation of Petroleum Exporting Countries) supply was poised for the biggest drop in more than two decades of nearly 500,000b/d in 2016, and pushed up its “call” on Opec oil in the second half of next year to an average 32 million barrels a day, a level the group last pumped in the throes of the 2008 oil-price super-spike.
The IEA’s bullishness notwithstanding, oil’s recent rout has renewed speculation on Opec’s strategy of defending market share over price. The group is expected to stand firm at its next meeting on December 4.
Reports from a meeting of the oil ministers from the six Gulf Cooperation Council countries – including Opec members Saudi Arabia, the United Arab Emirates, Kuwait and Qatar – in Doha the week of September 7 suggested Opec would not revisit its current strategy, and it also does not expect any concrete action from sitting down with other major non-Opec producers.
The Russians would agree. Vagit Alekperov, chief executive of Russia’s second-biggest oil producer, Lukoil, was seen on Russia 24 TV on September 12 saying harsh geographical conditions and the production equipment used at several Russian fields made it “technologically” impossible to reduce output.

Demand side conundrum
If the supply response is a puzzle, the demand side of the equation remains even harder to fathom.
The IEA in its September report revised up its 2015 global demand growth forecast to 1.7 million b/d, by far the most optimistic of projections out there.
Opec and the US EIA, in comparison, see 2015 consumption growing by 1.46 million and 1.4 million barrels per day respectively over 2014.
While headline apparent oil consumption in China, which carries much of the weight of the global demand-growth story, rose a remarkably strong 10 per cent from a year ago, it might be worth paying attention to the country’s growing refined product stockpiles, especially of gas oil, which has seen sluggish demand.
These stocks are expected to start flowing out of the country in the coming months, with Platts estimating an overall 44-per-cent jump in Chinese product exports this year, averaging just shy of 600,000b/d.
Oil-demand growth is sensitive to economic growth, which is facing fresh headwinds in different parts of the world.
The Asian Development Bank on September 22 pared down its 2015 growth forecasts for Chinese and Indian gross domestic product to 6.8 and 7.4 per cent respectively, highlighting the risks from currency pressures and capital flight to the Asian region at large.
Sharp regional currency depreciations in recent weeks have eroded the benefit of much of the recent slide in crude-oil prices across the import-dependent economies of Asia.
Emerging-markets weakness and incremental barrels from a post-sanctions Iran in 2016 could worsen the oil glut before it gets better, pushing market rebalancing further down the road. Some now believe that could be 2018.
Iran is scheduled to begin dismantling the major components of its nuclear programme on October 18, with the International Atomic Energy Agency expected to file its report on the country’s compliance by mid-December.
Though the actual lifting of sanctions could take months, according to US officials, Iran is gearing up for a big comeback, and last month signed a preliminary oil-sales deal with South Africa.
Once South Africa’s largest crude-oil supplier, Iran was displaced by its Opec peers Saudi Arabia, Nigeria and Angola after coming under crippling Western sanctions in 2012.
Iran’s return will also ratchet up the Opec price war in Asia, where it plans to send 60 per cent of its oil once unshackled from sanctions.
This one promises to be a drawn-out battle.

Vandana Hari is editorial director for Asia at Platts, a provider of energy and metals information.