Analyst firm Wood Mackenzie said Friday that it would maintain its July 2 forecast of an average Brent crude oil price of $60/barrel, provided that Greece remains in the Eurozone and that the recent rout in China’s equity market doesn’t reduce China’s oil demand.
Global oil prices have declined in response Greece’s no vote on July 5 on further austerity measures, and continued to fall on news of China’s stock market rout. On Friday, Greece’s Prime Minister Alexis Tsipras submitted a plan for an economic overhaul of Greece following the Greek population voting down a plan drafted by international creditors for the repayment of the nation’s debt.
After incurring losses in eight of the previous 10 trading days, the Shanghai Composite on Thursday rose 5.8 percent to 3,709.33, while the smaller Shenzhen market rose 3.8 percent, The Wall Street Journal reported. But both the Shanghai Composite and Shenzhen markets have lost around a third of their value in the past month, and 51 percent of all stocks on the Shanghai and Shenzhen markets remain suspended.
Wood Mackenzie’s $60/bbl forecast was a moderate from June, with the expectation that oil prices would weaken on the expected announcement of an Iran sanctions agreement in July and a moderate implied stock build this quarter, the firm said in a July 10 press statement. In its July 2 update, the firm forecasted world oil demand to gain 1.33 million barrels per day (bpd) in 2015 and 1.14 million bpd in 2016, versus a weak .7 million bpd rise in 2014.
Continued strength in U.S. oil demand, the sharp decline in the U.S. rig count from its November 2014 peak, and the slowdown in U.S. production growth are supporting Brent prices from a sharp sell-off, Wood Mackenzie noted. As expected, U.S. crude oil production in the past few months has stopped growing on a month-to-month basis, and is showing smaller year-on-year gains, with global refining runs reaching a seasonal peak in July. “The projected gains in oil demand in 2015 and 2016 stabilize the imbalance between supply and demand that has weighed on prices since the second half of last year,” Wood Mackenzie said.
However, the firm said its forecast is dependent on the recovery seen in oil demand growth so far this year, which is based on its second quarter 2015 forecast for global gross domestic product growth of 2.4 percent this year.
If Greece remains in the Eurozone, Europe’s oil demand will be much improved over the decline that occurred in 2014. For 2015, Wood Mackenzie has forecasted an increase of 100,000 bpd, also an upward revision of 80,000 bpd from last month. However, Wood Mackenzie’s analysis – based on its second quarter GDP forecast of 1.4 percent growth in Europe as a whole in 2015 – is at risk if Greece leaves the Eurozone in what likely will be an ‘uncontrolled an disorderly manner.”
Wood Mackenzie has forecast China’s oil demand to rise by around 400,000 bpd in 2015 to 11.1 million bpd. This outlook is based on a forecast of seven percent GDP growth this year, implying a managed slowdown by the Chinese government in pursuit of its goal of economic reform. However, the recent decline in China’s equity market poses a risk to Wood Mackenzie’s Chinese demand outlook.
The recent sharp correction by the Shanghai Composite following a bully rally over the past year has injected fear into the community and is likely to impact consumer spending, albeit minimally in Wood Mackenzie’s view. The shock could affect the expected recovery of car sales and associated fuel demand growth in China.
“As a result, diesel and petrochemical feedstock demand growth would be at risk, as they are closely linked with the investment in the infrastructure and petrochemical sectors, although much of this investment will be somewhat immune to the equity crash,” said Wood Mackenzie.
Concerned about sustained weakness in its economy, the Chinese government recently has slashed interest rates and bank reserve ratio requirements, and infrastructure spending programs have been accelerated. Wood Mackenzie’s July 2 forecast took into account expected Chinese growth for gasoline due to more cars on China’s roads, particularly SUVs. It also takes into account a projected slowdown in diesel for the rest of 2015.
One positive effect of China’s equity market slump is that investment has shifted into the nation’s real estate sector, providing some support for recent stabilization of China’s house prices. Oil demand also could get an additional boost provided that the government implements more stimulus policies to stabilize Chinese economic growth, Wood Mackenzie noted.
Assuming that negotiators meet the July 10 deadline of an agreement on Iran sanctions, indicators support Wood Mackenzie’s view that sanctions against Iran’s oil industry will be lifted in stages, with 2016 oil production gains of 220,000 bpd in average annual terms and growth of 135,000 bpd in 2017 to an average 3.1 million bpd.
“Despite the lack of an immediate impact on Iran’s crude oil exports in 2015, the announcement of a deal is likely to weigh on oil prices in the third quarter,” Wood Mackenzie said. Should a deal not be reached or be defeated by U.S. Congress, the oil market will price in the implications of continued sanctions, which means less oil supply in late 2015 and 2016, providing upward oil price pressure. The oil market also could react to additional actions against Iran to curtail its nuclear program.
WOOD MACKENZIE MAINTAINS U.S. OIL PRODUCTION OUTLOOK
Wood Mackenzie said it was maintaining its outlook for U.S. oil production, with the U.S. industry’s underlying economics remaining resilient at $60/barrel of West Texas Intermediate crude. However, the industry will struggle at prices below that level, and recent gains made in the U.S. rig count could reverse if oil prices remains weak.
“The slowdown in U.S. production growth is sharp, but unless the number of active drilling rigs show further falls, we do not expect any sustained period of production decline this year,” Wood Mackenzie said.
Nearly all long-term growth from the U.S. that Wood Mackenzie considered in its base case is at risk with prices lower than $65/bbl. “The strong production momentum that carried forward into early 2015, despite the plummeting number of active rigs, has already largely dissipated and output is in the process of levelling off.”
Wood Mackenzie doesn’t expect a sustained period of production decline in 2015 unless the number of active drilling rigs declines further, but 2016 U.S. crude production could be at risk if companies do not start increasing drilling investments going into fourth quarter 2015.
Recent company announcements support Wood Mackenzie’s view of increasing activity, the firm noted. On Wednesday, Pioneer Natural Resources reported that it would increase its Texas drilling activity after selling its stake in an Eagle Ford pipeline and processing business. Other companies also have indicated they might add rigs, but are waiting to see where crude prices settle. But price weakness going forward could alter the course.
The recent builds in U.S. crude oil stocks – which rose to 2.3 million barrels the last week of June and another .4 million barrels the week ending July 3 — add to concerns about oversupply, but Wood Mackenzie said it was not prepared to call the last two weeks a reversal of a trend yet as the four-week moving average remains at a draw of 1.2 million barrels per week, citing the change in report timing due to the U.S. Fourth of July holiday.