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Analysts agree on near-term crude oil price weakness but diverge longer range

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Analysts agree on near-term crude oil price weakness but diverge longer range

Most analysts agree that crude oil prices will remain under pressure in the near-term outlook amid a confluence of geopolitical and fundamental concerns. However, looking further out, a murkier picture offers expectations ranging from lingering price weakness to crude oil priced near $100 per barrel.

The West Texas Intermediate, or WTI, crude oil futures price fell more than 15% from $63.10/bbl on May 20 to a June 3 settle at $53.25/bbl. Brent crude oil futures followed a similar path, falling almost 8% from a May 16 peak of $72.62/bbl to finish June 3 at $66.87/bbl.

"While tight fundamentals supported oil prices through mid-May, escalating trade wars and weaker activity indicators have finally caught up with oil market sentiment," Goldman Sachs lead analyst Damien Courvalin said in a June 2 note. "The magnitude and velocity of the move lower were further exacerbated by growing concerns over strong US production growth and rising inventories as well as technicals."

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Goldman Sachs expects Brent crude oil futures to average $65.50/bbl in the third quarter and expects an additional decline to a $60/bbl average for 2020.

But Fitch Solutions, while decreasing its Brent crude oil forecast, sees a still relatively strong $70/bbl for Brent crude in 2019, slightly better than the $69.64/bbl average price for Brent crude in 2019 that the U.S. Energy Information Administration anticipates. For 2020, Fitch expects Brent crude oil to average $76/bbl, while the EIA expects it to average $67/bbl.

Raymond James analysts, who admitted to being more bullish on the oil market than most analysts, project a fourth-quarter exit rate at $83/bbl for Brent and $75/bbl for WTI, with 2020 prices reaching $100/bbl for Brent and $92.50/bbl for WTI.

While the trajectory of prices over the next 18 months remains unclear, analysts agreed about the near-term downside risks for prices. Courvalin said recent economic data is lagging market expectations and economists estimate the next leg in U.S.-China trade tariffs could cut global GDP growth by 0.3% over the next three years, which puts downside pressure on the market. The downside risk could be compounded if China retaliates, if tariffs with additional countries are levied and if consumer confidence is hit by rising uncertainty, he said.

According to the Fitch analysts, a rapid resolution, whether by putting a stop to escalating tariffs or by an outright trade agreement, could provide reassurance to the markets and support crude prices; however, a further impasse would only add weight to the bearish views of the economy.

U.S. President Donald Trump has proposed meeting with Chinese President Xi Jinping at June's G-20 meeting in Japan.

The demand-side implications derived from the macroeconomic concerns are dominating price action and market sentiment, Fitch said.

Courvalin said oil demand could be even weaker than the macroeconomic data suggests and might have even declined year over year in March with refining margins continuing to weaken as well. However, uncertainty remains high given the headwind of a mild winter, excess available refining capacity and preliminary April data pointing to better demand growth, Courvalin said.

From a supply-side perspective, OPEC-plus members are expected to continue to manage the global oil market by rolling over the production-cut deal in its current format at the end of June, Courvalin said. Yet U.S. inventories are rising more than normal, and while Iran exports fell sharply in May, it remains difficult to estimate by how much.

The EIA forecast that OPEC crude oil production will average 30.3 million barrels per day in 2019, down by 1.7 million bbl/d from 2018. By 2020, the EIA expects OPEC crude oil production to fall by 0.4 million bbl/d to an average of 29.8 million bbl/d. Production in Venezuela and Iran will account for most of the OPEC output declines in 2019 and 2020, but the EIA expects these declines to be partially offset by production increases from other OPEC members.

Global oil inventories will decline by 0.2 million bbl/d in 2019 and then increase by 0.1 million bbl/d in 2020, the EIA said.

Fitch noted that as Venezuela, Iran and OPEC-plus remove barrels from the market, U.S. shale growth is expected to slow down from 15.7% in 2018 to 9.4% in 2019. Taken together, the significant supply-side tightening seen through the first half should support a more bullish outlook for crude oil prices in the second half and beyond, Fitch said.

"In our view, the oil price is not currently reflective of market fundamentals," the Fitch analysts said.