Strong global demand for oil is insufficient to offset a strong supply outlook that has driven prices back below US$50 per barrel, and Saudi Arabia no more appears to have the necessary market clout to change prices.
“This remains a supply-driven market,” said Michael Tran, a New York-based commodity strategist at RBC Capital Markets. “Supply drove us into this low price environment and offer will have to be what ultimately digs us out.”
Tran thinks oil could retest the lows from earlier in 2015, but he thinks WTI prices will ultimately average somewhere in the low US$50s through out the year.
The strategist noted that Saudi Arabia’s energy strategy becomes less effective as competing countries boost production, and Tran believes the battle for share of the market is nowhere near its end, particularly in Asia.
He doesn’t think prices within the US$40-t0-$45 range are sustainable for just about any lengthy period of time, and anticipates WTI prices will average US$63 in 2016. However, the backdrop remains firmly bearish due to the global supply backdrop and resilient production, in addition to a glut of light, sweet oil within the Atlantic Basin.
That’s why a move higher from US$60 to US$75 will end up more and more difficult, and is not a level Tran sees prices stabilizing at over the following 18 months, unless there\’s some geopolitical, supply-side shock.
“Demand is robust and has exceeded the expectations of many, but at the end of the day, demand are only able to take us so far,” the strategist said.