Surplus Prompts Predictions $40 Oil, Warnings That Q2 Will Be The Best For The Foreseeable Future

BNP Paribas and JBC Energy predict $40 oil due to production recovery in other countries.

For those who think global market is in the doldrums for the summer of 2016, analysts last week sent the clear message that the second quarter might be as good as it gets for oil companies, with a slide back down to $40 per barrel likely.

Despite the worst of the oversupply said to be behind us, BNP Paribas SA and JBC Energy GmbH predict $40 oil later this year due to production recovery in Canada, Iran, Nigeria, and the U.S.

Giovanni Staunovo, an analyst at UBS Group AG, also predicts a drop to $40: "The oil market has still to absorb higher supply from the return of disrupted production."

The International Energy Agency agrees huge stockpiles will continue to impact prices: its data  shows that the combined inventories  of everything from crude and refined products to natural gas liquids held by industrialized nations reached a record of over 3 billion barrels last month.

The agency also found that U.S. output declines have caused Middle East production to climb to a record of 31 million barrels per day for a third month in June, amid near-record supply from Saudi Arabia.

Amrita Sen, chief oil analyst at Energy Aspects Ltd., told Bloomberg, "In many ways, the bigger issue is the total inventory overhang: it is the plight of oil products - in particular the light products such as gasoline - that is slowing the pace of total stock-draws even as crude stocks fall, and of the eventual re-balancing."

Analysts surveyed by Bloomberg estimate that BP, which will be the first of the five biggest non-state oil majors to announce second-quarter earnings next Tuesday, will report an adjusted net income of $822 million: 37 percent lower than the same time last year but the highest in three quarters.

They believe Shell and Total SA will report comparable numbers, thanks to improved refining margins; however, these margins are starting to contract, and the glut combined with other factors means that volatility will persist for the next few years, according to Ben Van Beurden, chief executive officer for Shell, who earlier this month stated, "If we get to a point where we do not see a better recovery of the oil prices, therefore a better balance in our finances, we will be very much minded to defer projects."

As if to compound the bad news, pundits last week also warned that oil prices are expected to remain choppy as Russia and Libya along with Iran and other countries are boosting output.