Daily Management Review

Lingering Supply Glut Forces Moody's to Slash Oil Forecast for 2016


Lingering Supply Glut Forces Moody's to Slash Oil Forecast for 2016
Due to the high levels of supply that may be heightened by the lifting of sanctions against Iran Moody’s has cut its oil price forecast for next year by $10 a barrel.
The assumption price for Brent crude, the international benchmark, was sliced to $43 a barrel from $53 by the credit rating agency. Moody’s also cut forecast for the North American benchmark, the West Texas intermediate crude, to $40 a barrel from $48.
The agency forecast that as consumption increases in the US, China and Russia, the global oil demand will rise by about 1.3m barrels a day next year, higher than the previous estimate by Moody’s.
But according to Moody’s, the growth in demand has been negated by the increase in Opec production. This has created a trend of leading to a rapid buildup of oil stocks that is expected to continue next year with only a limited pickup in prices later.
The global supply and oil is expected to increase by just $5 a barrel in each of 2017 and 2018 due to the US's decision to waive sanctions against Iran if conditions are met, Moody’s said.
 “Increasing consumption will not match the increase in supply. It will take time for these large global inventories to unwind, and combined with the possibility of new supply coming online from Iran, we expect oil prices to remain lower for a longer period than previously anticipated,” Terry Marshall, a senior vice-president at Moody’s said.
The medium-term forecast for Brent crude was cut by Moody’s to $63 a barrel by 2020. This is a little more than half the $115 reached in summer 2014. Moody’s price revision comes after the global prices of oil fell below $40 a barrel this month. Prices slumped after Opec stuck by its strategy of pumping more oil to hold on to its share of the market and, it hopes, weaken smaller US producers.
“Opec oil producers continue to produce without restraint as they compete for market share, exacerbating the currently saturated markets. Russia has also greatly increased production, and the possibility that sanctions will be lifted on Iran in 2016 could flood the market with even more supply,” Marshall added.
On the other hand, the there was slight rise in the prices of oil o Tuesday following a slump to near 11-year lows in the previous session. This created heightened interest among the investors to buy due to the low price.
However the prices were still near troughs last seen during the financial crisis due to a lingering supply glut.
There was a gain of 79 cents for Brent crude to reach $38.71 a barrel. This was near the benchmark breaking a seven straight session of losing. US crude was up 79 cents at $37.10.
"It's technical buying. It's pretty obvious shorts started to take profit when Brent prices dropped down to the 2008 low," said Tamas Varga, oil analyst at London-based PVM Associates.
(Source:www.cnbc.com & www.theguardian.com)