Oil price recovery likely in the second half of 2016

Abu Dhabi: Oil prices are likely to recover in the second half of this year and go back up into the 60s as non-Opec supply gets reduced, energy experts said.

“We could see some improvement in oil prices later in the first quarter as Middle Eastern oilfields undergo maintenance in February. However prices are not going to manage a significant recovery based on current fundamentals till the middle of the year,” said Richard Mallinson, an energy expert at London based Energy Aspects.

“In the second half of this year we think Brent is going to go back up into the 60s because the balance is going to tighten as non-Opec supply gets reduced.”

The standoff between Saudi Arabia and Iran is important for Middle Eastern stability and over the medium terms for the whole region, he added.

“The oil market is largely discounting the issue in terms of the price and that reflects the fact that there isn’t any immediate loss of supply because of tensions that have built up. However, dismissing geo-political developments entirely is probably shortsighted.”

“Not only we had this tension but also we had heavy fighting in Libya near oil terminals. These don’t mean immediate reductions but underline the deep instability that can be a risk to supplies in the long term.”

Saudi Arabia severed diplomatic ties with Iran after protesters attacked its embassy in Tehran on Saturday following the execution of anti-government activist Shaikh Nimr Al Nimr. He was killed along with 46 others accused of terrorist offences.

Oil prices rose as tensions between the two countries escalated on Monday, but plunged later in the day due to weak economic data from China. Brent dropped to less than $35 (Dh129) per barrel on Wednesday as supply continues to outpace demand.

“The market has concluded that the last thing Iran and Saudi Arabia wants is to cut off supplies considering how desperate they are to maintain revenues. Instead the attention has returned to the pre-crises focus on oversupply ahead of US inventory report later on Wednesday,” Ole Hansen, a commodity analyst from Saxo Bank said.

“We are watching a market which has moved into speculative exaggeration with recently established long positions being closed. The reduction in the geo-political risk premium has hurt Brent crude the most with its premium to WTI disappearing,” he said.

He added the first quarter is likely to be the most challenging with a price pick-up not expected until the second half.

“A seasonal rise in US inventories combined with the lifting of the Iranian export ban should ensure low prices over the coming months.”