No Cut, No Freeze Needed for $85 Oil By the End of 2016: Cornerstone

Speaking last week on CNBC's Power Lunch, Rothman based his prediction on the argument that demand has been understated.

Analysts such as Goldman Sachs have persistently predicted $30 per barrel oil and Natixis more recently cited this figure as a distinct possibility in the wake of the failed Doha talks, but Mike Rothman, founder of Cornerstone Analytics, has reiterated his earlier prediction of $85 oil by the end of this year.

Speaking last week on CNBC's Power Lunch, Rothman said oil demand has been understated for the last couple of years and that in the first quarter of 2016 demand "came in about 1 million barrels a day higher than what the consensus believed."

Thus, the argument that the market is being oversupplied by as much as 2 million barrels a day is "very faulty math."

He argued that demand will grow by 1.8 million barrels per day for the remainder of 2016 while non-Organization of the Petroleum Exporting Countries supply will contract by 800,000, and "there's no way OPEC fills a 2.6 million hole."

Therefore, Brent will sell for $85 by year-end - a price which Rothman says is an artificial price that Saudi Arabia mentioned two years ago as a "likely good resting point on the way up," and this will come without a production freeze or cut.

Ship & Bunker data indicates that, based on current trends, $85 Brent would mean the IFO380 Global Average Bunker Price would rise some $200 from today to $420 per metric tonne (pmt), while IFO380 across Ship & Bunker's Global 20 Ports Average would hit around $385 pmt.

Two Prices

As the Cornerstone founder advanced his theory, he said there were only two real prices in a discussion; one that kills supply, and one that kills demand.

"We just saw the price that kills supply. The price that kills demand is very far north of here. In between is what someone's willing to try to fight or defend. So when the Saudi's mention a price, it's something that's critical, or you look at their budgets, that tends to become a centre of gravity," he said.

Meanwhile, analysts are pointing to declining U.S. production as more evidence that the market is rebalancing.

But the rebalance is coming at a horrific cost, with the number of active U.S. oil rigs falling to 343 and service providers such as Schlumberger Ltd. reporting more job cuts in Q12016.

Scott Roberts, portfolio manager and co-head of high yield at Invesco Advisers Inc. in Atlanta, says, "What we're hearing from the oil services companies is just carnage; the cutbacks are having a big impact on U.S. production."

While many analysts and some OPEC members maintain that the global oil market will begin rebalancing next year, Energy Aspects Ltd. has calculated that it won't be until 2021 before accumulated global stockpiles will be cleared and a true market recovery will commence.