Crude oil may fall again in near-term, rebound to $60 by year-end
The 2015 average crude oil target price of 10 leading global brokerages polled recently stands at $58.8 a barrel
Crude oil prices have came off sharply in the past few months and have bounced a bit to around $61 a barrel (Brent crude) levels currently. However, leading brokerages believe prices are going to rise by December 2016 even though they could see some fall from current levels by end of the current calendar year.
As per Bloomberg data, the 2015 average crude oil target price of 10 leading global brokerages polled recently stands at $58.8 a barrel, which is a four% lower than Wednesday’s levels of about $61 a barrel.
This number is likely to rise to $74.6 per barrel in 2016 (see table). These numbers clearly suggest that the worst seems to be behind as far as crude oil prices are concerned. There are some outlier projections as well, but others are not convinced.
“Talk of excess production is being overplayed as the world was only marginally oversupplied in 2014/15. As oil falls below $70 per barrel, higher cost producers will start to trim output. We believe demand will start responding to lower prices. China is already starting to fill its boots on lower prices”, write analysts at CLSA in a recent report on crude oil.
Of the 10 analysts polled by Bloomberg, only four expect it to end 2015 at below $60 per barrel, with rest factoring in levels of $60 per barrel to $67 per barrel. Lowest forecast stands at $51 indicating 16.8% downside from current levels while highest forecast of $66.9 points at 9.1% upside from current levels. Brokerages though are not ruling out further downsides in the short-term.
“We remain cautious on near-term oil prices given the excess supplies and tepid growth in demand. Any return of Libyan or Iranian oil would add further downward pressure on oil prices, with the prospect of declines below $40 a barrel”, believes Nic Brown of Natixis. For 2015 though the brokerage expects crude to be at $60 a barrel and move up to $74.5 a barrel in 2016.
Citigroup too echoed this view earlier this month.
“Oil production in the U.S. is still rising. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out. A pullback in production isn’t likely until the third quarter,” wrote Edward Morse, Citigroup’s global head of commodity research in a recent report, as per Bloomberg news. He believes crude could fall to the $20 level in the short term. For 2015 though his target stands at $54 a barrel.
Meanwhile, weak crude oil prices (below $100 a barrel witnessed over past few years) are a big positive for India which is a net oil importing country. Oil imports form about 33% of India’s total import bill and weak crude oil prices could improve its current account and fiscal account deficits. Both CPI and WPI inflation could move lower by 20-50 basis points for every $10 a barrel fall in crude prices, estimate analysts.
Sectorwise, banking and financials will benefit significantly from lower crude prices given that lower inflation and improved liquidity could strengthen the case for rate cuts, which in turn can improve credit demand. Crude and crude derivatives form key inputs for FMCG, tyre companies and paints companies besides reflecting on other energy prices like coal. Among potential gainers could be HUL, Asian Paints, Apollo Tyres, MRF, GCPL and many more.
And hence, decline in crude prices could benefit such companies in the form of higher margins/higher demand if they pass the benefits to end users. Auto sector will witness improved demand momentum given that lower fuel prices reduces the cost of owning and maintaining automobiles.
The impact is mixed for oil and gas companies. While state-run upstream (ONGC, OIL) as well as downstream (IOC, BPCL, HPCL) companies will reap the benefits of lower under-recoveries and subsidy burden, the realisations of private upstream companies’ (Cairn India, Reliance Industries) will be hit due to lower crude price.