3 factors why significant rise in oil prices unlikely

Oil prices will not return to levels anywhere near $100 per barrel, Thomas Pugh, commodities economist at British economic research and consulting company Capital Economics believes.

“The recent bounce back in oil prices has prompted speculation about whether they are about to return to the $100 per barrel levels of the last few years. However, there are some major headwinds, both on the supply and demand side, which mean that significantly higher prices are unlikely,” Pugh said in a report, obtained by Trend.

Oil prices have rebounded sharply over the last month. Currently Brent prices is about $65 is per barrel, whilst the price of WTI is close to $60 per barrel.

The most important reason for the recovery is the growing evidence that US oil production is leveling out in response to the previous sharp falls in prices, Pugh said.

However, the economist believes that there are a number of reasons why oil prices will not go much further.

“For a start, US supply could quickly rebound in response to the recent recovery in prices. Based on the historical relationship with prices, the fall in the number of drilling rigs already looks overdone and activity is likely to rebound over the next few months. In addition, two of the largest US shale firms, EOG and Pioneer, have said that they will boost drilling again once oil prices stabilise at around $65 per barrel. Any further rise in prices above this level will no doubt stimulate even more production to return,” Pugh said in the report.

In the meantime, according to Pugh, despite more flare-ups in tensions in the Middle East, supply from OPEC has continued to climb, even before the potential boost from the easing of Western sanctions on Iran.

He believes that it is highly unlikely that other OPEC members would cut back their own output to allow Tehran to regain market share, so any increase in supply from Iran should put downward pressure on oil prices.

The third factor, Pugh believes, should prevent prices from surging again is the unprecedented level of US stocks.

“There is now about 480 million barrels of oil in commercial storage in the US which will take a considerable amount of time for refineries to work though, even if production doesn’t rebound,” he said.

“Given that oil prices have swung from $110 to $40 and now back towards $70, we are wary on placing too much emphasis on a single “magic number”. However, we do think prices are now more likely to fall than to rise further over the rest of the year,” Pugh said.

Capital Economics’ end-2015 forecast for Brent remains $60 per barrel. For 2020 company’s analysts expect price at $70 per barrel.

/By Trend/