Oil to average just over US$40 in 2016, biggest cut to forecasts in a year

[LONDON] Oil prices will average just over US$40 this year, the biggest cut to monthly forecasts in a year, as an influx of Iranian barrels hits an already-saturated world market, a Reuters poll showed on Friday.

The survey of 29 economists and analysts forecast benchmark North Sea Brent crude will average US$42.5 a barrel, down US$10 from last month's poll.

This would be the largest drop between monthly surveys since January last year and the eighth successive monthly Reuters poll in which analysts have lowered their price forecasts.

Brent crude, which averaged about US$54 a barrel in 2015, has fallen nearly 9 per cent so far in January and has crashed from around US$115 a barrel in June 2014.

Oil prices fell below SU$30 a barrel this month to their lowest since 2003, under pressure from mounting concerns about the inability of even robust demand to keep pace with supply and the unlikely prospect that the world's largest producers would agree to curtail output.

"The most immediate issue for the market will be just how much oil Iran brings back to the market ... A significant difference to Iranian production in either direction should have an impact on prices," Capital Economics commodities analyst Thomas Pugh said.

Geopolitical tensions between Saudi Arabia and Iran may prevent the Organization of the Petroleum Exporting Countries from coming to a consensus on cutting supply, analysts said.

"The chance of Opec taking any decision to cut output is highly unlikely. Saudi Arabia will participate in the output cut only if all the Opec members as well as other big producers (like Russia) also reduce output," CRISIL Research director Rahul Prithiani said.

Russia's Deputy Prime Minister Arkady Dvorkovich said on Friday the country's output could decline as a result of lower investment, but the state would not intervene to balance the market.

That appeared to pour cold water on possible joint Opec and non-Opec production cuts mentioned by Russian Energy Minister Alexander Novak on Thursday, comments which raised hopes of the first such global output deal in over a decade.

Record-high production from Opec's second-largest producer, Iraq and the addition of Iranian barrels after Western sanctions on Tehran were lifted have heightened concern that even growing demand will not be enough to absorb the extra supply.

"Even if no major event happens but supply remains more resilient than expected and demand a bit weaker, we could still see prices drift lower," Pugh said.

Analysts expect Brent and WTI futures to average US$34.4 and US$33.2, respectively, in the first quarter, considerably higher than what the futures market is pricing in.

Brent was trading at US$33.85 a barrel and WTI was at US$33.29 for March delivery.

The poll forecasts US light crude will average US$41 a barrel this year compared to around US$49 in 2015.

JPMorgan had the lowest 2016 forecast for Brent at US$31.25 a barrel, while Standard Chartered had the highest at US$63.

REUTERS