Low $40s for Crude "Is The Right Place To Be," Says Analyst; But $90 is Where It's Heading, Says Another

Monday June 19, 2017

Although the Organization of the Petroleum Exporting Countries (OPEC) failed to boost prices beyond the low $50s and disappointed countries with cash-strapped economies, one oil executive believes even that middling price was the result of "misplaced optimism" and says the low $40s is where the market ought to be.

Warren Gilman, chairman and CEO of CEF Holdings, told CNBC that, "I think the low $40s to the mid $40s is probably the right place for [crude] to be, I would argue for at the lower end of that spectrum."

He added, "We had some misplaced optimism when the price was up in the $50s; as I said several months ago, people were looking at OPEC with the rosiest of rose coloured glasses...I think it was OPEC's Disneyland that we were looking at for the past few months.

"We're getting back to the fact that we're getting increasing production from OPEC members, increasing production from non OPEC members, and we've got a reasonably slow level of demand growth that is easily met by growth of production from non-members like Canada and the U.S. - so why in the world would we have an environment of rising oil prices?"

Gilman went on to say, "I think today it's much more realistic and heading lower"; as for the U.S. shale players, "They're good I think until we hit below $40; they'll continue to ramp up production.....they're continuing to drop production costs [and] they're being ruthlessly efficient."

Fahad Kamal, senior market strategist at Kleinwort Hambros, is of like mind: he told Bloomberg television "I don't know if oil is going below $40, but certainly it's going to be relatively range bound between $45 and $55, and the reason for that is the same as it has been for a long time: we're just producing far too much oil."

He added, "The world needs about 96.5 million barrels per day [bpd], we're producing about 97.5 million bpd, so you do the math; we though the 1.8 million bpd production cut would have helped, and it certainly would have, except for shale ending up shooting OPEC in one foot and OPEC shooting itself in the other." 

As fundamentally compelling as these outlooks are, it wouldn't be a Friday without at least one expert expressing boundless optimism for the near future: Jean-Guy Desjardins, chief executive officer of Fiera Capital Corp. and the man who correctly predicted that Canadian equities were due for a rebound, now says oil prices will double.

He said, "The fundamentals of the global supply-demand relationship are favoring higher oil prices; when it goes up it's going to go up for an extended period of time.

"I think it can go back to $90, not in six months but over a couple of years."

Although a median forecast in a Bloomberg survey calls for $65 crude in 202o, Desjardins believes global central banks will keep some amount of stimulus as their economies recover, boosting demand for crude.

Last week, Fereidun Fesharaki, founder and chairman of FGE, predicted oil will drop between $30 and $35 unless OPEC deepens its cuts immediately by at least 700,000 bpd.