Oil prices seem not able to stabilise. Just on Wednesday they were like on a roaller coaster and falling by 2% at the end of the journey. Since mid-April, oil prices drops amount 16% on US drilling and demand slowdown concerns, despite OPEC led efforts to curb supply. Citi’s research analysts targets two significant issues on this recent decline: disinflation pressures and what would happen if oil prices don’t recover.
Disinflation pressures are coming from lower oil highest in Frontier Asia, Thailand, India, Singapour. Fuel weights relatively high and historical sensitivity to oil price changes is also high after controlling for food prices. As reported by experts:
Singapour’s high inflation sensitivity to oil when fuel weight is very low can probably be explained by the highly cyclical nature of Singapour’s inflation and should probably be discounted if we see the oil price decline as being more supply -driven.
Given where we are in the inflation/output gap, persistent oil slump may matter most in influencing monetary policy expectations in Thailand and India.
On the other hand, following the recent pact by OPEC members to extend the existing production cuts through Q1’18, oil prices could continue to flounder.
One argument has been that at some point, whether at the end of Q1’18 or at some other time , OPEC opens the taps back up while U.S. E&Ps continue to ramp production. Thus , investors are asking what happens if oil prices remain at around $45/Bbl, or lower, for an extended period? Citi’s answer regarding their 35 -company E&P coverage group, “it does not appear much could alter the course for the rest of 2017.” They explain:
For most, wells spud today won’t be turned on for 4 -6 months; our coverage group, on average, has hedged ~ 40% and ~ 42% of projected oil and gas production for H2’17; and the projected increase in active domestic oil rigs from current levels , i.e. 295, by year -end is only 32 .
Furthermore, they believe many E&Ps have built -in “cushion” in production guidance.
Therefore, if oil prices remain at around $45/Bbl for the rest of this year, we don’t expect significant changes in production guidance or projections.