MENU

Could Oil Prices Be On The Verge Of A Stunning Comeback?

Crude prices have enjoyed something of a resurgence in recent days as a cross-market relief rally has emerged. The Brent benchmark — which plunged to fresh six-year lows around $42.50 per barrel last week — flipped as high as $54 just yesterday, giving the likes of BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) a welcome shot in the arm.

A surprise 5.45-million-barrel drop in US oil inventories did the crude price no harm, either. However, total stockpiles still stand at an eye-watering 450.8 million barrels, at least according to the Energy Information Administration. Which begs the question: is the oil price rise nothing more than a ‘dead cat bounce’?

Brent set to bounce?

Well, the boffins at Bank of America-Merrill Lynch certainly believe that more upside could be in the offing — the broker advises that “prices will rebound into year-end on a combination of factors,” and expects Brent to close 2015 at $55 per barrel.

Bank of America expects oil to benefit from “an accelerating decline in non-OPEC oil supply kicking in over the next few months,” noting that “US oil output alone [is] set to drop by one million barrels a day by the second half of 2016.” It adds that increasing monetary stimulus across emerging regions should add further support, while global demand should pick up as we head into winter.

There may be trouble ahead…

However, the broker has also been quick to downgrade its forecasts further out, thanks in part to softer market balances. The broker now expects the price to average $55 per barrel in 2016, down from the previous $58 projection, and $61 in 2017, a slight reduction from the prior $62 estimate.

And I reckon further downgrades could be in the offing as the oil market balance remains in murky waters. Bank of America estimates that worldwide oil demand grew by 1.6 million barrels per day during the first six months of 2015, twice the average rate seen during the past four years and driven by brilliant demand from China and India. But the deteriorating economic health of such emerging market support levers casts further questions over crude imports looking ahead.

Beijing has been forced into a variety of measures in recent weeks to resuscitate the ailing economy, and allowed the yuan to fall to four-year lows in mid-August in a bid to boost exporters. But as Bank of America notes, a 1% fall in the currency’s value versus the US dollar typically leads to a 5% fall in the oil price. And additional measures cannot be ruled out by Chinese authorities in a bid to stave off the dreaded ‘hard landing.’

And I do not think expectations of reduced US production should be taken for granted, either. Latest Baker Hughes rig data showed the number of drills in operation rise for the sixth successive week last week, to 675. Although down from the record peak of 1,609 last October, this steady uptrend adds further instability to the market given that output from the country’s most productive oilfields shoots higher.

Oil majors across the world are becoming increasingly vigilant in addressing worsening market conditions — indeed, BP and Royal Dutch Shell announced more job cuts and capex reductions just last month in an effort to ride out the current storm. But with OPEC and non-OPEC supply still steadily rising, and poor economic data from China casting doubts over future demand, I believe Brent prices are in danger of shuttling much, much lower.

So if you believe that the oil sector remains a risk too far at the present time, I strongly recommend you check out this totally exclusive report that identifies a wide range of FTSE winners with robust investment prospects.

Our "5 Dividend Winners To Retire On" wealth report highlights a selection of incredible stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical and utilities plays that we are convinced should continue to provide red-hot dividends. Click here to download the report -- it's 100% free and comes with no further obligation.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.