WTI may slip further before late year recovery

OREANDA-NEWS. July 22, 2015. US crude futures may slide further through the third quarter before starting a recovery toward the end of the year, as seasonal refinery maintenance worsens an oil oversupply in a market already pressured by a strong dollar.

Crude dipped below \\$50/bl in intraday trading yesterday and today, its lowest level in three months. A close below \\$50/bl may mean a move toward targets near \\$46.40/bl, according to a technical analysis by UK-bank Barclays. Once it reaches that level, prices may recover toward \\$50/bl with sideways trading expected around that price level through the third quarter.

Bank of America Merrill Lynch (BoAML) has stuck with its forecast that WTI could double dip to \\$50/bl, but recover to \\$57/bl by year-end. It is sticking with its May view of WTI averaging \\$53-\\$58/bl and Brent at \\$57-\\$62/bl in 2015.

"The sell-off of the past three weeks warns of increased short-term risk to the downside," Barclays said. "The oil market has struggled to get back on its feet since bottoming in the first quarter."

The "panic level" for the market is still lower than the recent drop just below \\$50/bl, yet the drop to around \\$42/bl in March is "definitely unsettling," said IAF Advisors director of research Kyle Cooper. Some companies get in trouble at around \\$50/bl but "a lot are hurting" at around \\$40/bl, he said.

In a possible sign of a fresh round of belt tightening by US independents, Chesapeake said today that it will stop paying common stock dividends beginning in the third quarter as the drop in oil, natural gas and natural gas liquids (NGL) prices squeezes cash flows. Suspending the dividend of \\$0.35 per share will save about \\$240mn annually, it said.

Oil plunged to a near six-year low in the first quarter amid a surge in supply, in part triggered by the US shale boom, and a worsening demand outlook in China and Europe. The market, however, recovered through most of the second quarter prompting some producers like Chesapeake, Occidental, Devon and Pioneer to plan an increase in activities. But the latest drop of nearly 20pc since the peak touched in May could make producers more cautious.

The market could retest those March lows in September and October and possibly push lower as the US is about to pass its peak demand period and global output remains solid, Cooper said.

Prices remain vulnerable to renewed weakness because the market is likely to stay in a physical surplus through the end of 2016 based on recent Opec production levels, Citi Futures Perspective analyst Tim Evans said. Any recovery in production from Iran following the possible lifting of sanctions in December, could just add to the surplus and push back any swing toward undersupply to 2017, 2018 or even beyond, he said. "I don't see much upside potential for prices."

Cooper said he is surprised that there has not been more merger and acquisition activity from reduced credit availability following the downturn. "That may still be around the corner and if prices do continue to fall, the number of bankruptcies may increase," he said.

US shale producers like EOG Resources, Pioneer Natural Resources and Continental Resources are prime acquisition targets for majors who are under-exposed to US unconventional resources, US bank Goldman Sachs said. Global oil majors have \\$150bn "of firepower that won't stretch their balance sheets" and can defer \\$325bn of capital spending on the top 420 marginal projects, it said.

But a small group of US independent producers, including Pioneer and WPX, so far remain unfazed, announcing plans to increase rig counts despite the weak oil market.

Schlumberger and Halliburton, the first- and second-largest oilfield services providers, said they saw tentative signs of an improvement in the market, which may lead to a modest uptake in activity later this year. Halliburton doesn't expect the pullback of the past three weeks to immediately change the US shale oil producers' operations outlook, but the outlook remains weak.

"Over the last three weeks it hasn't changed that much," Halliburton's chief executive Dave Lesar said yesterday. "So I would describe where we are today as scraping along a bottom. And scraping along a bottom means that we don't anticipate dramatic change of any sort certainly over the near-term."

The US rig count fell last week, ending three weeks of gains and tempering hopes of a sure-footed recovery in drilling activity. The total count fell by six to 857, Baker Hughes said, bringing the number back down to the lowest levels since the 845 seen in January 2003.

"We think about the rig count, it has puts and takes," Lesar said. "And so, it was seeing some improvement, but then Friday I suppose those gains were erased."