Oil Rout Seen Ending as Demand Trumps China’s Market Crash

Oil Pumping Operations At Kazakh Oilfield Operated By EmbaMunaiGas
Workers perform maintenance on an oil pumping unit, also known as a "nodding donkey", at an oilfield operated by Embamunaigas, a unit of KazMunaiGas Exploration Production, in Akkystau village, near Atyrau, Kazakhstan, on Saturday, July 4, 2015. The majority Muslim country is central Asia's biggest oil producer. Photographer: Andrey Rudakov/Bloomberg

Oil’s biggest slump in four years will lose momentum because the plunge in Chinese equities and Greece’s economic crisis won’t dent global demand, according to Morgan Stanley, UBS Group AG and Societe Generale SA.

Crude is set for a “modest recovery” after declining 13 percent in the five sessions through Wednesday, Morgan Stanley estimates, while demand will push prices up by year-end, according to hedge fund manager Andrew J. Hall. Any nuclear deal with Iran won’t quickly revive the OPEC member’s crude exports, so wouldn’t immediately weigh on prices, Societe Generale said.

U.S. crude erased this year’s gains to trade at about $52 a barrel amid a stock-market rout in China, the world’s second-largest oil consumer. European leaders talked openly about a Greek exit from the euro before a weekend summit, a break from years dismissing the possibility. Nuclear talks between world powers and Iran, the fourth-largest producer in the Organization of Petroleum Exporting Countries, missed another deadline.

“The market has no need to re-test the lows” of $42 reached in March, Paul Horsnell, head of commodities research at Standard Chartered Plc in London, said by e-mail Thursday. “Iran will be slow to return even if there is a deal. And the longer the market stays low, the greater the squeeze on supplies” from outside OPEC.

Global Turmoil

West Texas Intermediate added 60 cents to $52.25 a barrel in electronic trading on New York Mercantile Exchange at 11:26 a.m. London time. The U.S. benchmark grade dropped 13 percent in the previous five trading sessions, the steepest decline since August 2011. Brent crude, the European marker, rose 48 cents to $57.53 on the London-based ICE Futures Europe exchange.

The combination of Greece, Iran, China and an unexpected expansion of U.S. crude stockpiles combined to bring down prices, said Mike Wittner, head of oil market research at Societe Generale.

“That’s your Four Horsemen of the Apocalypse right there, but we don’t think it’s an Apocalypse Now,” Wittner said by phone from New York on July 7. “Are the fundamentals $10 weaker than they were two weeks ago? I don’t think so.”

Excess Supplies

Others say a persistent surplus in global oil supplies is a more important cause of the price slide, and see scope for further declines.

Surging OPEC output and resilient drilling activity in the U.S. will push WTI to $45 a barrel by October, according to Goldman Sachs Group Inc. The U.S. benchmark could fall below $50 a barrel this week as economic concerns compound the effect of the surplus, according to BNP Paribas SA.

“We may not have seen the bottom for the oil price,” Eugen Weinberg, head of commodities research at Commerzbank AG, said in an interview in London on Wednesday, predicting that WTI may touch $45 a barrel and remain below $50 for an extended period.

The global market will remain amply supplied into 2016, Total SA Chief Executive Officer Patrick Pouyanne said at a parliamentary commission in Paris Wednesday.

Despite the selloff prompted by the Chinese stock slump and the risk of Greek default, demand strength in the U.S. and Asia still points to a rally by the end of this year and into 2016, Hall wrote in a letter to investors in his Astenbeck Capital Management hedge fund dated July 1.

“To see a stronger downward move we need to see other factors,” such as an impact on economic growth and fuel consumption, Giovanni Staunovo, an analyst at UBS, said by e-mail from Zurich Wednesday. If Brent crude were to dip below $55 a barrel, it would only be temporary, he said.

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