Banks slash price projections as WTI nears $30/bl

OREANDA-NEWS. January 12, 2016. Crude prices may be headed down to the \\$20-\\$25/bl range largely because of a stronger US dollar and devaluation of the Chinese yuan, analysts at Morgan Stanley said today.

Other analysts — including BofA Merrill Lynch, Societe Generale and Wells Fargo — also cut their price forecasts this year after US benchmark WTI futures dropped by about 10pc last week. Prices were down by another 5pc in midday trading today, with lows under \\$31/bl.

Prices have been pressured by record high crude and product inventories, signs of slowing global economic growth and Iran's imminent re-entry into the market as western sanctions are lifted.

But Morgan Stanley analysts contend that deteriorating fundamentals are no longer driving the decline.

"Oversupply may have pushed oil prices under \\$60/bl, but the difference between \\$35/bl oil and \\$55/bl oil is primarily the US dollar," the analysts said.

A 3.2pc appreciation in the US dollar, as implied by a 15pc devaluation in the Chinese yuan, could drop oil prices by \\$2-\\$5/bl, which could put oil in the high \\$20s/bl. If other currencies shift as well, the move in the US dollar could be greater, sending prices lower by 10-25pc.

Morgan Stanley is forecasting that the US dollar will continue to rise, in part because the Federal Reserve is the only central bank raising interest rates and the US economy remains resilient.

US bank BofA Merrill Lynch has cut its forecast for full-year 2016 Brent and WTI, to \\$46/bl from \\$50/bl for Brent and to \\$45/bl from \\$48/bl for WTI. High inventories could drive prices into the mid-\\$20s/bl in the near term, the bank said, but by the end of the quarter Brent is expected to be at \\$38/bl and WTI at \\$37/bl. By the end of the second quarter, BofA sees the crudes trading at parity at \\$47/bl.

French bank Societe Generale has slashed its 2016 price forecasts in reaction to factors including Opec's removal of a production target, the expected return of more Iranian crude and resilient US production.

Societe Generale now sees Brent averaging \\$42.50/bl, a \\$11.25/bl downward revision, while WTI is now forecast at \\$40.50/bl this year, a \\$9.25/bl downward revision.

But even after the adjustments, the risks to Societe Generale's 2016 outlook are mainly on the downside, because of the possibility of a weaker Chinese economy and a downturn in emerging markets. Ice Brent is now forecast to be \\$35/bl in the first quarter before rising steadily to \\$40/bl, \\$45/bl and \\$50/bl in the following three quarters. Nymex WTI tracks the Ice Brent forecast at a \\$2/bl discount over the same period.

Wells Fargo lowered its 2016 price forecasts as well, with WTI falling to \\$45/bl from \\$46.75/bl and Brent down to \\$47.50/bl from \\$49.25/bl. Wells Fargo said declining US production will be a focal point in the market this year. US output should be down by 500,000 b/d by April compared to a year earlier and continue to fall into the first half of 2017, the analysts said.