Oil Bears Return to Prominence With Thursday's Market Losses, Forecast $50/bbl Shortly

RBC Capital Markets says global supply and demand will be impacted in April by Venezuela. File Image / Pixabay

Another drop in crude prices on Thursday - this time by 1 percent for West Texas Intermediate, which represents the longest losing streak since last April 2017 - has fortified bearish sentiment in the analytical community, with predictions that oil will return to the mid-$50s shortly.

WTI settled down 64 cents to $61.15 and Brent dropped 72 cents to $64.79 per barrel, both benchmarks having slid for five consecutive days now, and again reportedly in reaction to yesterday's news from the U.S. Energy Information Administration that crude production last week rose to a record high of 10.25 million barrels per day (bpd).

Prices were also said to have been compromised by the restart of the Forties pipeline in the North Sea, following an outage the previous day that caused prices to climb higher; additionally, Thursday's market activity was influenced by an announcement from Iran that it is looking to boost production over the next four years.

As the week draws to a close, all but vanished is talk from major banks such as Goldman Sachs that crude will hit the $80 mark later this year; instead, Commerzbank on Thursday echoed the growing analytical line of thought by stating, "It is now clear that oil prices in late January were too high to keep the oil market balanced in the long term; this is because U.S. oil production is now rising so sharply that there is a risk of renewed oversupply if OPEC does not voluntarily renounce market share."

As for what to expect in coming months, John Kilduff, founding partner at Again Capital, reiterated what had been widely expected before Goldman and other banks grabbed media attention with their $80 forecasts: "The Iranians are looking to increase production...despite their alleged adherence to the OPEC-Russia deal; everybody is itching to produce more oil," he said, in reference to the Organization of the Petroleum Exporting Countries' output reduction strategy.

Kilduff went on to suggest that there and other factors will cause crude to return to a more familiar range-bound status: "Prices have gotten knocked around by the dollar for the better part of two months now," he said, explaining that the relationship between oil prices and the dollar,  where one rises as the other falls, has recently reasserted itself.

"The dollar index got down to 86 [cents], crude got to $66," he said. "[The] dollar index is now back over 90, crude's back down around $61, ready to break and I think fall back down into the mid-$50s here fairly rapidly."

However, if Helima Croft, head of global commodity strategy at RBC Capital Markets, proves correct, then there's still a chance the global market could swing the other way and suffer the equally undesirable outcome of overtightening, due to the worsening economy of one of Latin America's biggest oil producers.

She stated in a note, "We continue to contend that, given 2018's tightening oil market, any potential geopolitically driven supply disruption would have an outsized impact versus recent years when the market was awash in crude.

"The clear and present danger to watch is Venezuela, which arguably has progressed past the risk stage given that production is in freefall."

RBC projects a fall of at least 700,000 to 800,000 bpd this year for the Bolivian republic, and Croft pointed out that "Against this bleak backdrop, the recently scheduled April elections could prove to be the catalyst for more civil strife and economic sanctions that would further erode output."

Despite the bears regaining the media's attention, it is presumably still agreed that the U.S. is the only clear victor of a rapidly-changing market: earlier this week, data from the EIA showed that it will export more energy products than it imports by 2022, a status it hasn't achieved since 1953 and wasn't expected to achieve until 2026.