While Barclays do not rule out further weakness for the Brent crude oil prompt month contract in the near term, they do not see prices acclimatising below the $100/bbl mark past Q2.“Progressing through the tail end of Q2 and into the second half of 2013, we see strong indications for demand growth developing which will keep the call on crude elevated.” Barclays said.
A combination of refinery maintenance, weak margins capping utilisation rates, as well as improved supply availability in the Atlantic basin, has already been adding pressure at the prompt for crude.
The trigger for the move below $100/bbl, however, came from a packed tide of cross currents from sell-offs in other asset classes, along with the recent stream of poor macroeconomic data from the US and China.
Over the April-to-May period, the Bank expects oil market fundamentals alone to offer very few catalysts for an immediate upside retracement.
“Until we see such fundamentals-driven retracement, however, the pace of fall on the downside is likely to be slow, and we highlight three layers of immediate support on the fundamentals side that will support prices.” the Bank noted.
The first level of support is expected to come from several consumers which have been waiting on the sidelines for a better entry point for their hedging programmes. Barclays sees a pick-up in hedging activity on the first leg of downward adjustment from current levels.
“If this fails to hold in the near term, until we see an improvement in fundamentals approaching the tail end of Q2, the second layer of support is likely to come through market expectations surrounding comfort levels for OPEC producers to continue producing above their target, below the $100/bbl, which they have lately mentioned as appropriate for both consumers and producers.” the Bank added.
While actual output by OPEC producers is likely to react only to a prolonged state of weakness in prices below their comfort level, the further it moves from the $100/bbl mark, the more the market is likely to gauge these factors.
Finally, the third layer of support is expected to come from cost curves, which once again are unlikely to be brushed (at least for the high-cost marginal producers relying on discounted differentials from Brent) until the $90/bbl mark is touched.
“However, the likelihood of such an extreme weakness can be ruled out for now, in our view,” the Bank concluded.
Source: Barclays