Oil’s surge masks risk of Brent slumping to $40 after summer

Brent crude could potentially drop to $40/bbl or below in the first quarter of 2018 without deeper output curbs by Organisation of Petroleum Exporting Countries, OPEC, according to an oil analyst at industry consultant JBC Energy GmbH.

The benchmark for more than half the world’s oil may end 2017 between $45 and $47/bbl, after which the market may turn “very tricky,” said Richard Gorry, managing director at JBC Asia. While prices are being supported by recent U.S. inventory draws amid the summer driving season when fuel demand typically peaks, that trend will reverse from early-September as consumption weakens, he said.

Brent crude extended gains on Wednesday, trading up 0.4% at $50.39/bbl at 6:32 a.m. in New York, riding a rally as industry data showed U.S. stockpiles plunged last week.

“Brent could go to $40 and even below,” Gorry said in an interview in Singapore on Tuesday. “That’s not necessarily what we’re forecasting, but we don’t know where exactly the market is going to trade and how bearish it’s going to be.”

JBC is flagging the risk of a drop in prices as the Organization of Petroleum Exporting Countries and some partner nations grapple with the implementation of output curbs aimed at easing a global glut. At a meeting earlier this week in St. Petersburg, Saudi Arabia promised deep cuts to crude exports next month, emphasizing its commitment to eliminating the oversupply even as fellow OPEC members Libya and Nigeria were told they are free to keep increasing production.

“If OPEC stays the same and we have the same output restrictions even in the first quarter, we’re looking at a lot of surplus in the market,” Gorry said. “To really tighten the market, OPEC will have to cut more, and I don’t know if they want to do that.”

Oil slumped into a bear market last month, after giving up most of the gains it made following OPEC’s agreement late last year to begin cuts from January. Beyond the renewed focus on exports, the St. Petersburg meeting made no changes to the supply deal to correct that underwhelming performance.

Still, crude has climbed about 10% over the past month as U.S. inventories have shown signs of declining. Demand may slow after September, while oil output from producers in Brazil, Kazakhstan, West Africa and central Europe is set to rise in the first half of next year, Gorry said.

U.S. output is continuing to ramp up, with the nation pumping 9.4 MMbbl daily, close to the record 9.6-MMbbl levels seen in 2015. American production may again rise to 9.6 MMbpd by the end of 2017, according to Gorry. Asia-Pacific is the only region that will see output declines as China shuts wells, he said.

Abiodun oyindamola, with Agency report