The recent surge in oil prices will not only pause but will also reverse course and tumble to as low as $25.00 a barrel. At least, that’s what oil expert John Kilduff predicted in an interview with CNBC on Monday.
Kilduff based his oil price forecast on the fact that the oil glut still exists. Supply is much more than demand and this picture won’t change even after the April 17 meeting in Doha, Qatar. (Source: “Forget $40—it’s back to $25 oil: John Kilduff,” CNBC, March 21, 2016.)
The U.S. oil benchmark has rallied 38% since it settled at a 52-week low of $29.85 a barrel on January 20. West Texas Intermediate (WTI) for May delivery is currently trading above $40.00 a barrel.
“I think it’s going to be a buy-the-rumor, sell-the-news phenomenon to the extent they even do meet next month,” Kilduff, the founding partner of Again Capital, an alternative investment manager specializing in energy and metals, said in the interview.
Members of the Organization of the Petroleum Exporting Countries (OPEC) are planning to meet with Russian energy officials and other oil producers to strike an agreement to limit output. (Source: “Meeting for major oil producers to cap output set for April,” MarketWatch, March 16, 2016.)
“It’s certainly going to disappoint the market,” he said, adding that even with a freeze, the persistent glut and lack of a production cutback sets up oil prices to retreat to their February lows.
Talks have been ongoing for weeks to set up a meeting between OPEC members like Saudi Arabia and Venezuela and big producers outside the group like Russia. Saudi Arabia, Russia, Venezuela, and Qatar had already agreed on February 16 to limit their oil production to January levels, as long as other big producers like Iran follow suit.
Kilduff said the April meeting isn’t likely to bear any fruit, basing his contention on Saudi Oil Minister Ali Al-Naimi’s announcement in February that Saudi Arabia would not curtail production because it did not trust other countries to do the same. “They won’t cooperate in the freeze deal until they get to pre-sanction levels,” said Kilduff.
Output in Iran, at the same time, continues to soar after sanctions were lifted in January.
Meanwhile, on Friday, analysts at Bank of America Merrill Lynch introduced a 2016 year-end target of $54.00 for WTI.
Analysts at Bank of America Merrill Lynch on Friday warned that with the Saudis “no longer trying to moderate seasonal price swings, lower driving demand coupled with the autumn refinery turnaround” could push WTI prices back down to $39.00 per barrel by the end of September.
The analysts forecasted back in February that oil prices would hit $47.00 by June, due to a strong summer seasonal pickup in driving demand, easier-than-expected monetary policy, and falling U.S. shale oil production. (Source: “Oil futures fall, but muster 5th straight weekly gain,” MarketWatch, March 18, 2016.)
Kilduff also said a higher rig count announced on Friday doesn’t necessarily have anything to do with the recent rally in prices; instead, it further solidifies his oil price outlook.
“The rig count’s at a low not seen since 2009, I’m not sure how many more rigs they can take out of service at this point,” Kilduff said, adding that the oil market has priced in OPEC’s upcoming meeting and the freeze deal.
On Friday, Baker Hughes Incorporated (NYSE:BHI) reported that the number of active U.S. oil-drilling rigs rose by one to 387, while total active domestic oil rigs fell by four to 476. (Source: “Baker Hughes reports first weekly rise in U.S. oil-rig count this year,” MarketWatch, March 18, 2016.)
The increase for domestic oil rigs was the first in 13 weeks, while the total U.S. rig count marked another record-low.