COULD the plunge in the price of oil last week be the start of a reversal in prices which have been on the mend since the pledged production cut in January?
While some think these could be the current support levels, others do not discount further downside, especially as traders, caught in record long positions, rush for cover.
“The risk is there as we move into the second quarter,” said Suhaimi Ilias, the group chief economist of Maybank Investment Bank.
The deal to cut oil production between the Organisation of Petroleum Exporting Countries (Opec) and non-Opec is only for the first half; it is extendable by another six months, subject to the outcome of their meeting in May.
“Our assumption of an average of US$55 per barrel is based on a full year deal to counter rising US shale output,” said Suhaimi.
Oil traders may drive prices lower.
“Oil speculators may drive prices much lower if they get stopped out of their record long positions. A stampede to cover these long positions may cause a sudden and steep drop,” said Pong Teng Siew, head of research, InterPacific Securities.
US light crude has dropped below US$50 per barrel for the first time this year.
Crude oil stocks in the US, the world’s top oil consumer, has surged to 528.4 million barrels, an all-time high and up 8.2 million barrels in a week, well above forecasts of a two million-barrel build, according to Bloomberg.
The surge in US inventories occurred despite a pact by Opec and other exporters to cut output by 1.8 million barrels per day in the first half of the year. US light crude reached an intraday low of US$48.79, down US$1.49, before recovering to trade around US$49.70 a barrel last Thursday. It had plummeted 5.4% last Wednesday and settled at US$48.49 on Friday.
Whither the direction of oil price?
“Shale production volumes could very well recover at current price levels and put a cap on any further meaningful price runs. There are likely to be uneven price spikes during the year that are news driven with supply conditions at fairly ample levels,” said Thomas Yong, CEO of Fortress Capital.
“I will be more convinced of oil price gradually moving to US$60 per barrel if the pact to cut production by Opec and non-Opec is in order over the next few months.
“Oil price may hover between US$50 and US$60 per barrel fundamentally and will be affected (it may possible overshoot the price range), by speculative force,” said Danny Wong, the CEO of Areca Capital.
“It may plunge further but should not drop below US$35 per barrel,” said Chris Eng, head of research, Etiqa Insurance & Takaful.
“Oil price may not suffer a prolonged decline but it looks like the age of Opec dictating price is over with the arrival of shale oil.
“It may be hard for oil to persistently stay above US$55 per barrel,” said an analyst.
Prices could fall to US$40 per barrel if Opec doesn’t extend its existing agreement to cut production, Scott Sheffield, chairman of Pioneer Natural Resources Co, was quoted as saying by Bloomberg. The strength of global demand is an important factor.
“Amid lingering concerns over supply, and continued adjustments in inventory relative to demand, what could drive the current oil price volatility is the strength of global demand, as well as US dollar and interest rate outlook.
“A stronger dollar rally backed by higherthanexpected US rate hikes would result in higher borrowing costs for traders to build speculative positions,” said Lee Heng Guie, the executive director of Socio Economic Research Center.
“There is a risk of demand not rising as much.
“China’s policy direction suggests acceptance for slower growth as authorities focus on financial stability risk which signals tighter monetary and banking policies,” said Suhaimi.
From shale companies to deepwater and conventional, US oil companies are working hard to drive down breakeven costs to survive the wild ride in oil prices, according to Bloomberg.
Eldar Saetre, head of the Norwegian oil giant Statoil ASA, told delegates at the CERAWeek energy conference hosted by IHS Markit last week, that the break even for his company’s next generation of projects had fallen from US$70plus to ‘well below’ US$$30 a barrel.
For some new projects tying back to existing facilities, executives said they could avoid losses even at US$12 a barrel, said Bloomberg.
In fact, the wellhead breakeven costs for US shale plays declined 46% between 2014 and 2016, a Bloomberg report said, quoting Rystad Energy, a Norway-based industry consultant.
With the main index for the KL stockmarket nearing its peak at 1,730-1,750 points, is there a likelihood of it hitting 1,800?
“The strength of the index has surprised me,” remarked an analyst. “Along with the expansionary US economy and infrastructure spending, I see support for global growth and exports. With that, corporate earnings will recover, forming a support base for an upbeat equity market at 1,800 for the KL market is achievable,” said Wong.
“Reaching 1,800 points in the first half will be a stretch but I would not rule it out. My estimate is only 1,750,” said Pong.
Columnist Yap Leng Kuen wonders if the price of oil will go through another roller coaster ride.