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iBank Focus - 2014 Crude Oil Price Outlook Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Sat Dec 28 13 10:05 ET

Crude oil prices would very likely record annual gains in 2013, following a year of decline in 2012, as driven by weakness in US dollar, unexpected supply outage and relatively bullish investor positioning. Yet, the risk/reward appeared rather unappealing as we moved toward 4Q13 while the potential return of supply, weak refinery margins and sluggish demand seemed to have provided little upside for prices. Fed's beginning of QE tapering in January would likely affect economic growth and the greenback's performance. These in turns would affect crude oil prices' performance in the coming year. This piece aims to unveil how renowned investment banks see the movement of crude oil prices in 2014.

Deutsche Bank: Deutsche Bank has turned rather bearish on both WTI and Brent crude oil, expecting both to weaken by more than US$10/bbl in 2014 amid increase in supply in the US as well as resumption of output in oil producing countries such as Iran after severe disruption over the past years. The bank stated that following "significant supply disruptions in the oil market over the past year, we see the growing risk of an oil supply glut developing as rampant US oil production growth collides with the prospect that Iranian and Libyan oil returns to the market".

It forecasts that US oil supply would increase by 1M bpd in 2014, marking "the third year of growth at that rate and contributing to 60% of total non-OPEC supply growth in the year". The growth, mainly driven by "shale's dramatic entry to the US oil balance in 2012", would make US oil production overtake Saudi Arabia and Russia in coming years. While the bank expects supply disruptions in Libya would carry on in 2014 due to the "political unrest in the North African country", it is more optimistic over Iranian supplies and anticipates the country's exports to normalize in as early as 2H14.

Deutsche Bank forecasts that "non-OPEC supply growth will be more than 70% greater than global oil demand growth". Rising non-OPEC supply would eventually lead to production cut in OPEC members, in particular the big brother, Saudi Arabia. The OPEC might need to lower its production nearly 1M bpd in 2014 in order to defend oil prices. The cartel had not need to cut production by such a great amount since the global financial crisis in 2008 and 2009.

Bank of America Merrill Lynch: BofA Merrill Lynch also holds a moderately negative outlook over global oil prices amid oversupply concerns. It notes that the oil market is "moving from a relatively balanced position to a slightly oversupplied one due to increased output from non-OPEC and Iran". Despite a modestly higher economic outlook, lackluster inflation in advanced economies and mild inflation in emerging ones suggest that Brent crude would trade within a "slightly lower trading range" next year.

The bank expects non-OPEC supply growth, which surprised to the upside this year, would accelerate further in 2014 with total oil supply increasing by 1.4 to 56M bpd. While supply growth would be dominated by the US and Canada, expansion in Brazil should pick up after "two years beset by project delays". Yet, BofA Merrill Lynch sees limited impact from Iran's exports resumption. Despite the agreement between P5+1 and Iran would lessen sanctions against Iran and resume the country's oil exports, restrictions on crude oil sales would not be lifted for 6 months and any addition in output to the world market would be limited.

The bank in short expects Brent crude oil to fall to an average of US$105/bbl in 2014 but would fall to as low as US $90/bbl at some point in the year. The bank's bear case suggests that, in case of "non-OPEC production strengthens next year and Libya and Iran fully recover", the global oil supply demand balance could see a swing of 2-3M bpd, exacerbating the surplus outlook and the downside risks of Brent crude prices. For WTI, oversupply in US and Canadian crude oil market would send WTI crude to an average of US$92/bbl next year. It is even more bearish over WTI which could face additional challenges from "transportation, storage, refining and export bottlenecks next year, pushing the forward curve further into contango". The bank does not rule out a small risk that WTI might plummet to as low as US$50/bbl over the coming 12-24 months, as "evidenced by the collapse in Western Canada Select crude oil prices from US$91 to US$51/bbl in 2H13".

Barclays Capitals: Barclays Capitals appears less bearish than both Deutsche and BofAML as it sees downside risks in Iranian and Libyan production. According to the bank, oil would likely trade with "a modest downward bias in early 2014". Yet, "the unstable situation in the Middle East should remain a source of upside price risk". Overall, the bank believes that "the risks of an oil price spike some time in 2014 are still much greater than a big move lower".

While acknowledging the acceleration in US supply growth, the bank sees challenges for the ultimate removal of economic sanctions against Iran despite signing of the agreement recently. It remains skeptical over whether the US Congress would repeal the legislation and the failure of which greatly reduce the likelihood of concluding a final in 6 months. Barclays believes that the agreement would reduce the chance of military conflicts but unlikely to lead to an early return of the missing barrels to the market. Meanwhile, Libya would "continue to be affected by supply disruptions due to the proliferation of armed groups in the country as well as the profound weakness of government institutions, most notably on the security side". Barclays is also conservative over the supply outlook for Iraq and Nigeria.

Rather, it's more positive on the demand side. Despite slowing growth outlook in China, the country's demand for certain commodities such as aluminum, corn and oil are "still expanding at rates that are a long way above global averages and thus still adding to the overall level of global demand growth". On trading strategy, Barclays suggests to short Brent relative to WTI, instead of an outright short.

Credit Suisse: Credit Suisse thinks the consensus oil prices for 2014 are too bearish as it sees investors' concern next year is to "wait for events to put oil back on the market". The bank forecasts global oil demand to grow +1.4% in 2014, following a +1.4% expansion this year. The optimism is hinged on the rather upbeat global economic outlook for 2014. Expecting the economy to expand by +3.7% in 2014, following a +2.9% this year, the bank believes next year's economy would be "the most orderly in many years, comprising a seemingly stable triangle of modest growth, low inflation and diminishing potential". While emerging markets were the key demand growth driver over the past year, there would be a return to US growth next year. Credit Suisse expects China's oil demand would grow by less than +3% next year.

The flat demand growth rate despite an acceleration of economic growth was mainly due to the strength in supply growth. The bank expects much stronger non-OPEC growth in both 2014 and 2015. It sees much of the acceleration next year come from oil fields OUTSIDE the US while the US expansion would still continue. Credit Suisse is also skeptical that the return of Iranian and Libyan output would be meaningful in 2014.

Morgan Stanley: Despite the bearish outlook for next year, it however expects a spike in Brent crude price in the first quarter. The bank notes that Brent crude price is too cheap versus Asian crudes while product markets and cracks are increasingly supportive. Meanwhile, it expects recent refinery outages in Europe and China may result in a ‘catch-up' for runs in 1Q14 to rebuild product stocks while geopolitical/supply risks are likely to stay high into 1Q14.


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