Oil investors may get another shot at cheap barrels

[BENGALURU] Oil investors who missed the chance to buy crude at multi-year lows earlier this year might get another shot at securing a bargain, as prices are likely to slip in the near term before recovering more steadily, analysts said.

Crude prices have risen more than 70 per cent to around US$46 a barrel since hitting 12-year lows in January. However, investors baulked at pushing the price beyond US$50, unsettled by the risk an uncertain global economic outlook poses to the broader market, analysts noted.

Uncertainty stemming from Britain's decision to leave the European Union, a stronger US dollar and robust oil output from Opec that has fed a persistent supply glut, have lowered the chances of a brisk rebalancing of supply and demand.

"On one hand, there is uncertainty about future demand now that Brexit increased risks for lower global economic growth," Hans van Cleef, senior energy economist at ABN AMRO, said.

"On the other hand, there is uncertainty about future supply. Although there is still an oversupply in place, the effects of low oil prices are being felt badly."

Britain's vote to leave the EU wreaked havoc on global markets in late June, knocking as much as 5 per cent off crude prices on the day of the referendum result. Some analysts say the impact of Brexit could see prices fall below US$40 a barrel.

"Strong rhetoric over the negative effects of Brexit, a cessation of hostilities in Nigeria, the continued restart of output in Canada and further progress in Libya. Combine this with additional concerns over growth in China and elsewhere and you could easily see oil back below US$40," Capital Economics analyst Thomas Pugh said.

The prospects of returning production from Nigeria, Canada and Libya amid a bleak outlook for global demand growth could hamper any significant price recovery, analysts said.

Analysts believe oil should trade below US$45 a barrel to encourage fresh production cuts and provide the kind of boost to demand that would elicit renewed investor interest.

"Should we return towards the lows reached earlier in January-February, this could revive long-only interest in oil given the prevailing consensus of much higher oil prices by 2018-2019," said Harry Tchilinguirian, head of commodity strategy at BNP Paribas.

REUTERS