Wall Street keeping faith in oil recovery

Despite prices having dropped, stockpiles ballooned and doubts about OPEC’s effectiveness having grown, Wall Street hasn’t lost faith in oil’s recovery.

Last week in New York, crude fell below $50 a barrel on signs that OPEC’s production cuts aren’t clearing a global glut quickly enough, and that U.S shale drillers are ready to fill in any shortfall. Regardless, Goldman Sachs Group Inc., Morgan Stanley, Bank of America Corp. and Citigroup Inc. say they are still confident prices will increase by the end of the year.

In due time the world’s bloated oil inventories will decline as production cuts by OPEC and Russia take effect, meanwhile fuel consumption will remain strong, the banks predict.

“The outlook is no less bullish,” said Seth Kleinman, global head of energy strategy at Citigroup, who sees crude exceeding $60 a barrel later this year. “Bringing oil inventories down is a messy process, but the OPEC cuts are real, demand in Asia is decent and ultimately the market is tightening.”

There are several reasons to doubt the bullish case.

Despite OPEC’s unusually strong adherence with its own targets, U.S crude inventories are near record levels, the nation’s production at a one-year peak and the number of drilling rigs has almost doubled since May of last year. Russia and Kazakhstan, two of OPEC’s partners, have fallen short in regards to delivering their promised cuts, and Saudi Arabian production rebounded last month.

Oil demand still remains poised to overtake supply in the second quarter and start depleting global inventories, according to Goldman Sachs, which sees the U.S benchmark West Texas Intermediate topping $57 a barrel in three months.

“The oil market re-balancing is still progressing,” Jeff Currie, head of commodities research at Goldman Sachs in New York, said in a report on March 14. In a note two days earlier, Currie said “the market needs a little patience” for the effect of OPEC’s cuts to kick in.

In New York on Thursday, WTI rose 0.7 percent to $49.18 a barrel, while Brent added 0.6 percent to $52.12 a barrel.

As the surplus begins to disperse, U.S crude prices will climb to at least $64 a barrel in the third quarter, said Francisco Blanch, head of commodities research at Bank of America in a report on March 10th.

All four banks confirmed they are sticking with their forecasts, despite prices having dipped even further earlier this week. The bulls’ case received a boost on Wednesday, after Energy Information Administration data showed U.S crude inventories declined for the first time in 10 weeks. The rebound in U.S. drilling will slow down before output can make up for OPEC’s reductions, according to Morgan Stanley, which sees Brent reaching $62.50 a barrel by the end of the year.

“The case for further re-balancing in the rest of the year remains robust,” said Martijn Rats, a managing director at the bank.

Article written by HEI contributor Lydia Ezeakor.

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