Crude oil prices could climb back up to reach around $55 per barrel by the end of the year although the ride will be “bumpy”, an analyst has predicted.
In a market forecast, Saxo Bank’s head of Commodity Strategy Ole Sloth Hansen wrote that oil is suffering from chronic oversupply.
“It has to get worse before it eventually get better. That’s the current sentiment in oil markets and one that we agree with,” he said.
Oil prices touched six and a half year lows of below $40 per barrel last week after the Chinese stock market crashed and fears of a supply glut rose.
While oil rallied by the end of the week with Brent climbing back to around $50 per barrel, prices are still down more than 50 per cent when compared to peak rates of around $114 in June 2014.
“The Organisation of the Petroleum Exporting Countries, desperate to generate cash, has ramped up production while the expected reversal in US shale oil production has yet to materialise,” said Hansen.
During the coming three months US refinery demand for crude will also slow due to seasonal factors and this will lead to another increase in inventories which currently stand some 100 million barrels above the five-year average, he added.
“While it is generally believed that crude oil at $40 is unprofitable for many US producers the question is how soon we will see this impact in terms of lower production.”
Another concern he voiced is whether the upbeat forecast for demand growth can be maintained given the current uncertainty related to China, the world’s largest importer of crude.
According to official figures, the country’s crude imports increased by 22 per cent year-on-year in July to 7.25 million barrels per day.
The latest report from the International Energy Agency predicts that China’s overall oil demand will grow at 3.6 per cent this year, compared to 2014.
Globally, the IEA forecasts that oil demand will rise 1.7 per cent year-on-year in 2015 to reach 94.2 million bpd.
However Hansen warned that any downward revision to demand growth will only increase the supply glut.
“By year-end we see WTI crude oil back towards $55 but it could be a very bumpy ride getting there,” he added.
Last week Standard Chartered cut its forecast for average 2015 Brent prices to $54 per barrel, the bank’s second reduction in two months.
“We do not expect prices to rally strongly until supply-side dislocations become much more visible,” the bank said.
“The main supply-side tightening will likely come later, in mid-2016 and beyond, due to the lagged effect of capex costs on non-OPEC supply.”