The market could be flush with oil again next year unless OPEC keeps up its efforts to balance the market with production declines, an analyst said. Photo by AzmanMD/Shutterstock
July 5 (UPI) -- Danish investor Saxo Bank lowered its forecast Wednesday for the price of Brent crude oil, saying supply-side strains could emerge again next year.
Crude oil is selling for less per barrel than when it started off the year, when the Organization of Petroleum Exporting Countries began implementing a deal to offset the glut of oil on the market with managed production declines.
Parties to the agreement in May opted to extend, rather than deepen, the existing production cut agreement, but meet again later this month to consider the impact. Crude oil prices came under pressure last week after U.S. data showed a decline in American production and a downturn in rig counts, which is indicative of the amount of capital energy companies are willing to invest in exploration and production.
Compliance among parties to the agreement, which includes big non-OPEC producers like Russia, has been generally strong, though Saxo Bank said the impact has been muted because cuts in exports aren't on par with cuts in production. Output from Libya and Nigeria, two OPEC members exempt from the agreement, has also gained strength throughout much of the year.
Ole Hanson, the head of commodity strategy at Saxo Bank, said OPEC member states may find it advantageous to keep more of their oil at home to satisfy summer demand. With oil prices still below $50 per barrel, meanwhile, some operators in the United States might not have the financial means to maintain first-half momentum.
"These developments have left OPEC with a window of opportunity," he said in a statement. "If successful, the price of Brent crude oil is likely to rally back towards $55 per barrel during the coming months before renewed weakness sets in as the focus turns to 2018 and the potential risk of additional barrels hitting the market if OPEC and Russia fail to extend the production cut deal beyond the first quarter of 2018."
As a result, the bank lowered its year-end forecast for Brent from $58 per barrel to $53 per barrel.
Respondents to a survey published in June by the Federal Reserve Bank of Dallas said they expected the U.S. benchmark for crude oil, West Texas Intermediate, to hit about $48 per barrel by the end of the year. The U.S. Energy Information Administration said last month it expected Brent to average $53 per barrel for 2017 and WTI to average $51 per barrel.