While the crude oil market could not sustain a historic one-day rally posted in mid-September, crude oil prices should rise anew as fundamentals remain supportive, Barclays analysts said.
After surging by 15% to 20% after a Sept. 14 attack on Saudi infrastructure, West Texas Intermediate and Brent crude oil prices are less than $3 per barrel above where they were on Sept. 13. Breaking an eight-session losing streak, WTI settled Oct. 4 at $52.70/bbl while Brent settled at $58.32/bbl.
"Flat prices, currently more than 10% below our [fourth-quarter] forecast of $65/bbl for Brent, do not reflect the fundamental realities of the market in our view," Barclays analyst Amarpreet Singh said in an Oct. 3 research note. The analyst concluded that combined, supply and demand forecasts suggest the price of crude oil will have to move higher to encourage U.S. production.
Singh said escalating trade tensions with China, continued weakness in global manufacturing activity and increased likelihood of a disorderly Brexit led Barclays to trim its demand growth forecast by 200,000 barrels per day for both this year and the next, to forecast growth of 800,000 bbl/d year over year in 2019 and 1.3 million bbl/d year over year in 2020.
Yet oil market fundamentals remain supportive, he said.
Weekly U.S. government estimates suggest U.S. demand was up more than 400,000 bbl/d year over year in August and September, largely in line with Barclays' forecast, Singh said.
In China, the second largest oil consumer after the U.S., demand also remained robust, rising by more than 400,000 bbl/d year on year in August. The country's demand for oil products has grown by more than 500,000 bbl/d year on year on average during the first eight months of the year, according to Barclays' estimates.
Meanwhile, on the supply side, the largest oil producer, the U.S., saw production growth continue to slow amid tighter exploration and production spending alongside a slowdown in productivity.
Singh said in a Sept. 13 report that Barclays equity analysts' upstream spending survey suggests North American producers will likely cut spending by 15% sequentially in the second half to meet their budget target. Their best estimate for 2020 spending is flat to 5% lower year over year.
While capex budgets decrease, the productivity of mature wells is declining. The cumulative 12-month oil output from an average horizontal well in the Permian region grew just 7% in 2018, compared with the average growth of 18% over the previous four years, Singh said.
Energy Information Administration statistics show growth in Lower 48 onshore crude production continued to deceleratein July. "This data, along with the findings of the most recent Dallas Fed Energy survey, which showed operators are finding it difficult to increase output primarily due to lower commodity prices and continued investor focus on capital discipline, highlights downside risks to our 12.6 [million bbl/d] year-end forecast for US oil production," Singh said.
Inventories also suggest there is an impending supply-demand imbalance, Singh said. He noted U.S. core petroleum stocks, which include crude oil, gasoline, diesel and jet-kerosene, have declined by over 23 million barrels so far this year, compared with a 10-year average build of 16 million barrels, and that stocks will continue trending lower.
Barclays expects Brent to average $65/bbl in both 2019 and 2020, down from $69/bbl, and WTI to average $58/bbl in 2019 and $60/bbl in 2020 — "bullish with respect to both the curve and consensus," Singh said.
