Banks Again Lower Gas-Price Expectations

Banks have cut their forecasts on oil prices for a fourth consecutive month as their analysts brace for further supply when OPEC's agreement to cap output ends next year.

Members of the Organization of the Petroleum Exporting Countries renewed a deal with 10 other crude-oil producers in May to withhold almost 2% of global oil supply. The accord is set to expire in March 2018 and concerns are mounting among investors and others as that date approaches.

A poll of 14 investment banks, surveyed by The Wall Street Journal at the end of August, predicted that Brent crude, the international benchmark, will average $54 a barrel next year, down $1 from the July survey. The banks expect West Texas Intermediate, the U.S. oil gauge, to average $51 a barrel in 2018, down $2 from the previous survey.

The survey was conducted before tropical storm Harvey crippled refineries on the U.S. Gulf coast. Analysts say it is too early to say what the longer term impact will be of the storm, but it could have some beneficial effects on the oil price given U.S. supply has been hit.

On Thursday, Brent was trading at $52.06 a barrel while WTI was changing hands at $47.16 a barrel, as tropical storm Harvey continued wreaking havoc on energy prices.

"We still expect prices to fall back next year as the OPEC deal comes to an end and U.S. production growth accelerates again due to higher prices, " Tom Pugh, commodities economist at Capital Economics, wrote in a report.

Fundamentals have been going oil producers' way in recent months as inventory levels finally fall. On Wednesday, the U.S. Energy Information Administration reported that U.S. stockpiles, excluding the Strategic Petroleum Reserve, declined last week by 5.4 million barrels.

Stockpiles held by members of the Organization for Economic Cooperation and Development also declined in May, according to the latest available data from the International Energy Agency.

Despite this bullish data, analysts don't believe prices will be heading much higher.

"While we estimate that a very modest under-supply will persist through the end of the year, OECD inventories are unlikely to return to 5-year average levels any time soon," said Jason Gammel, research analyst at Jefferies.

Analysts also say that without further output caps, production from OPEC and Russia may rise, flooding the markets with crude and potentially sinking prices.

Even if the agreement was renewed, analysts doubt compliance with it would be guaranteed.

"We could see increasing dissatisfaction within individual members, who then will begin to overproduce on their quotas," said Hamza Khan, head of commodity strategy at ING Bank.

Indeed, many OPEC nations, which rely on oil for a substantial part of their budgets, are already failing short of their reduction targets.

Rising U.S. production, and increased supply from Libya and Nigeria, two OPEC members that are exempt from production caps, has added to the bearish sentiment on the market, said Carsten Fritsch, an analyst at Commerzbank.

On the demand side, growth in global oil consumption has been lackluster this year, further delaying the rebalancing.

"If you add higher supply with weaker demand growth you end up with a market we believed is oversupplied and susceptible to lower prices," Mr. Khan said.

Further out, the banks in the survey expect prices to stay below $60 a barrel in 2019. These analysts predict that Brent will average $58.47 a barrel, down from $76 a barrel in the August survey last year.

Analysts still see the U.S. shale industry as being key to the longer-term outlook for oil prices. Experts predict that the country will produce just shy of 10 million barrels a day next year, from around 9.3 million now. That would be this industry's highest ever annual average.

"We see continuing records being broken for U.S. production... That limits the power and ability of OPEC to control oil prices," Mr. Fritsch said.

(END) Dow Jones Newswires

September 01, 2017 01:44 ET (05:44 GMT)