More Good News/Bad News Oil Forecasts But the Upside is Still Only $60 Per Barrel

Thursday March 16, 2017

Although Wednesday's uptick in crude prices seems so far to be merely a blip capping several weeks of market downturns and overall angst, at least one analyst thinks better times are forthcoming later this year with oil trading at as much as $60.

Cedric Chehab, head of Asia research for BMI Research, told CNBC that from a short term perspective, oil "is sitting on a key trend line support, which means it could bounce off, also with greater moves by Saudi Arabia  and OPEC to curb a little bit of production - that would be positive, particularly after the decline we've seen.

"We see a modest trading range of around $55 to $60 over the year, which isn't too far up from where we are now."

Chehab's forecast falls in line with Goldman's Sach's outlook, revealed earlier this week in a note that stated it is "very confident" about commodity prices and maintains its price forecast of $57.50 per barrel for West Texas Intermediate in the second quarter.

Another recent vote of optimism came from Richard Mallinson, geopolitical analyst at Energy Aspects, who theorized that if the Organization of the Petroleum Exporting Countries extends its production cuts, then "we see prices above $60 before the end of the year."

But Chehab's prognostications were challenged by Jim Bianco, founder and president of Bianco Research, who on Wednesday told Bloomberg, "I think there's lot of potential first for $45 and it could potentially drag the market lower: oil's 18 percent of the high yield market, it's a big chunk of earnings, and as the oil price slides you wind up having oil companies squeezed...it could definitely be a drag for the whole market."

He added, "I do think oil is going to continue to head lower: there's way too much optimism in the market, way too many speculative longs in the market, too many people talking about how they can make money at $40 - and guess what, that's probably where we're going to go."

Bianco went on to note, "You can see oil going into the low $40s right now; ultimately it's not so much about price as it's going to be a conviction level: when does everyone give up on their bullishness on oil.

"It took $26 in February of 2016 in order to get that level; I don't think we're going to need to get down that low, but....I suspect you're going to see lower prices, you going to see wider high yield spreads, and you're going to see the stock market not taking it very well."

Bianco's view very much dovetails with analysts whose predictions are driven by a close look at fundamentals - case in point being John Kilduff, founding partner of Again Capital, who earlier this week proved himself to be even more fatalistic than Bianco by declaring that WTI prices will likely fall back to the November lows near $42 per barrel over the next few weeks, followed by what he calls "the real" test: "Could we retrace the entirety of the gains off the February 2016 low at $26.05? It is quite possible."