Dubai: Brent crude, which tumbled to its lowest level last seen in 2008, may see continued weakness in the near-term, but a modest recovery is in sight according to analysts as supply rebalancing takes place.
Brent for January settlement declined $1.80, or 4.5 per cent, to $37.93 (Dh139) a barrel on the ICE Futures Europe exchange. It was the lowest close since December 24, 2008. The contract decreased 12 per cent last week. This triggered a sell-off in local equity markets including Dubai, Abu Dhabi and Saudi’s Tadawul indexes.
The current bout of weakness has been triggered the indecision of the Organization of the Petroleum Exporting Countries in its December 4 meeting, where they abandoned price support for crude by removing Opec’s production ceiling in an already oversupplied market.
“Towards the end of the year, we would see more volatility, and downside in crude. The tilt of the market is so negative on that it is hard to find out any positive catalyst to this market to support any kind of even small rally,” Edward Bell, commodities analyst at Emirates NBD, adding “there are so many headwinds on the policy side, fundamental side and on the financial side.”
Oil prices have slumped 40 per cent since Opec embarked on a strategy last November to keep pumping and drive out higher-cost competitors.
Meanwhile, Opec is displaying hardened resolve to maintain sales volumes even as prices fall in an oversupplied market, the IEA said Friday in its monthly report.
Tighter balance
“The low oil prices that we have experienced over the course of 2015 has done a lot of damage and a lot of oil producers would be going into a phase of rebalancing in 2016. Overall we see a much tighter balance, but still probably in a surplus. But that said we would be a tighter position than this year, so prices would start to rise,” said Bell.
For 2016, Emirates NBD has an average forecast of $55 per barrel, up nearly 45 per cent from the current levels.
Mark Haefele, Global Chief Investment Officer Wealth Management at UBS, the world’s biggest wealth managers, also feels that crude may retest levels of $55 per barrel in another six months or so.
“We believe the current market surplus should largely clear by the second half of 2016. As market participants realise, the market will become nearly balanced, with room for a deficit at the end of 2016 and in 2017,” Haefele said in his 2016 investment outlook.
UBS expects Brent oil prices to rise from current levels to $55 in six months and $63 in 12 months.
Contracting non-OPEC supply of at least 0.3 millions of barrels per day (mbdp) and oil demand rising by 1.1-1.2 mbpd in 2016 would also trigger recovery in prices.
