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29 Jan 2016
Oil: Price drop sparks global recession fears – Danske Bank
FXStreet (Delhi) – Research Team at Danske Bank, notes that abnormally warm winter weather in northern America and northern Europe along with tighter monetary policy in the US, the euro area and China have weighed further on global oil demand over the past month.
Key Quotes
“The fact that the global goods trade has not grown the past couple of quarters shows that weak global demand has been the bigger contributor to the decline in the oil price. Global economic growth will likely be relatively modest this year and next year, with some improvement expected to set in towards the end of the year. It means that producers will have to continue to keep prices low to balance the market.
The current low price will not meet the fixed production costs for many producers outside OPEC, which has led them to cut back on new investments, but as long as the crude oil price is above USD10/bl marginal costs should be covered.
Following last summer’s successful implementation of the nuclear deal, sanctions on Iran’s oil exports have been removed and the country is set to attempt to raise production and exports back to the pre-sanction levels from 2011. In our view, Iran is likely to succeed in increasing crude production by up to 500kb/d over the coming year, whereas it will likely take a longer time before production has fully recovered the 1mb/d loss since 2011. Over the coming years the oil market will have to rely on new supplies coming from OPEC rather than non-OPEC due to a fallback in non-OPEC oil investment activity.
Price outlook
Weak global real economic and income growth will keep a lid on the oil price during the first half of 2016. In the latter half of the year and in 2017 this should improve, leading to a gradual rebalancing of the oil market. Along with an expected drop in the USD exchange rate this should help prices to recover.
We forecast the price on Brent crude to average USD36/bl in 2016 (revised down from USD50/bl) and USD49/bl in 2017. This would imply a price for jet fuel of USD356/MT and USD490/MT, a price for ULSD of USD331/MT and USD453/MT, a price for 0.1% gasoil of USD316/MT and USD435/MT and a price for 3.5% fuel oil of USD154/MT and USD216/MT in 2016 and 2017 respectively. Forecast revisions reflect lower global growth expectations.
Hedging recommendation
The forward market is factoring in a rebalancing of the oil market over the coming year and a subsequent gradual recovery in prices. It is noticeable that prices on longer-dated contracts have been less volatile than on front-end contracts. In our view, this still understates the impact of stronger global real economic growth and income growth, which we expect to see towards the end of the year and next year and the upside risk to prices from a worsening of the geopolitical situation in the Middle East. Therefore, we recommend consumers hedge exposure in H2 16 and 2017.”
Key Quotes
“The fact that the global goods trade has not grown the past couple of quarters shows that weak global demand has been the bigger contributor to the decline in the oil price. Global economic growth will likely be relatively modest this year and next year, with some improvement expected to set in towards the end of the year. It means that producers will have to continue to keep prices low to balance the market.
The current low price will not meet the fixed production costs for many producers outside OPEC, which has led them to cut back on new investments, but as long as the crude oil price is above USD10/bl marginal costs should be covered.
Following last summer’s successful implementation of the nuclear deal, sanctions on Iran’s oil exports have been removed and the country is set to attempt to raise production and exports back to the pre-sanction levels from 2011. In our view, Iran is likely to succeed in increasing crude production by up to 500kb/d over the coming year, whereas it will likely take a longer time before production has fully recovered the 1mb/d loss since 2011. Over the coming years the oil market will have to rely on new supplies coming from OPEC rather than non-OPEC due to a fallback in non-OPEC oil investment activity.
Price outlook
Weak global real economic and income growth will keep a lid on the oil price during the first half of 2016. In the latter half of the year and in 2017 this should improve, leading to a gradual rebalancing of the oil market. Along with an expected drop in the USD exchange rate this should help prices to recover.
We forecast the price on Brent crude to average USD36/bl in 2016 (revised down from USD50/bl) and USD49/bl in 2017. This would imply a price for jet fuel of USD356/MT and USD490/MT, a price for ULSD of USD331/MT and USD453/MT, a price for 0.1% gasoil of USD316/MT and USD435/MT and a price for 3.5% fuel oil of USD154/MT and USD216/MT in 2016 and 2017 respectively. Forecast revisions reflect lower global growth expectations.
Hedging recommendation
The forward market is factoring in a rebalancing of the oil market over the coming year and a subsequent gradual recovery in prices. It is noticeable that prices on longer-dated contracts have been less volatile than on front-end contracts. In our view, this still understates the impact of stronger global real economic growth and income growth, which we expect to see towards the end of the year and next year and the upside risk to prices from a worsening of the geopolitical situation in the Middle East. Therefore, we recommend consumers hedge exposure in H2 16 and 2017.”