The US government forecasts the global oil consumption to grow next year

Fadel Gheit, Managing Director, Oil & Gas Senior Analyst at Oppenheimer & Co, on oil

The US government forecasts the global oil consumption to grow next year by less than half the rate of 2010, when the world was in process of emerging from a previous recession. On this basis, the growth may not be sufficient enough to bridge the divide with supply. Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy, noted: “The recent rally appears driven by investors looking at catching the bottom of the market and the expectation that U.S. oil production has reached a turning point. But fundamentals, notably in the U.S., have not changed much”. Do you agree with the statement? What is your overview on this matter?

First and foremost, I think the market is expecting a much stronger overprice as we are going forward. However, the fundamentals do not actually support that. As a matter of fact, the oversupply on the market still persists and, to my view, the upside potential is limited. Unless we have a significantly higher growth in demand, which, indeed, is not very likely, and a much more lower supply, I believe the oil prices will probably move higher; however, at a weaker pace than previously.

Last time the oil crashed in the 2008 global crisis, and China raise its appetite for commodities. These days, China’s economy is expected to expand at the slowest pace of just 6.8%. John Kilduff, a partner at Again Capital LLC, said: “The Chinese economy is faltering, and the government is scrambling to keep it growing. If these interventions don’t work as hoped, the economy will slow further and with that there will be a decline in oil demand.” How do you evaluate the Chinese impact on the commodity?

Indeed, China has been and continues to be a highly important factor in the demand equation. Yet, there are two things we have to keep in mind. First of all, the absolute growth rate of the Chinese economy is moderating. It continues to moderate from the 2007–2008 levels, but it still is the highest in the world. Second of all, we have a much more energy-efficient economy in China today than in 2007 and 2008. Therefore, China can grow its GDP using less oil than any time in the last ten years. The energy efficiency is going to help China maintain relatively high economic growth, yet at a much more modest demand growth for energy in general and especially for oil.

According to a KPMG survey with votes from about 200 US senior energy executives, about 45% of all expect Brent prices to fluctuate between $50 and $59 per barrel this year. What is your forecast for crude this year?

I do believe that prices for the commodity will be around $60 for the WTI crude oil and about $65 for the Brent (give or take a few Dollars from each side). I do not see any significant support a much higher or lower prices. Basically, what we are seeing right now is that the shale production is beginning to be the “swing production” in the world. In the past, the Saudi Arabia used to be the “swing producer”, whereas today, it is North America and, specifically, the US. We have to keep in mind that the US shale production exceeds Kuwait and the Arab Emirates combined. Therefore, no matter what happens with the price on oil, shale production can flatten out or decline very slowly. Once the oil price recovers above $60, we are going to see the whole production not only stabilize, but continue to grow.