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Oil prices to face selling pressure

PETALING JAYA — The recent oil price rally doesn’t seem to have legs as prices came under pressure on stronger dollar and growing stockpile.

Oil prices have been hovering around the US$65 level since beginning of the month but a 3 per cent slip on Tuesday caused jitters among investors.

The worry is not baseless.

There is no indication that the 12-member Organisation of the Petroleum Exporting Countries will be cutting down on production in a June meeting while shale producers continue to improve efficiency.

That is despite rig count falling for close to half a year in North America.

A local report from North Dakota, where one of the biggest reserves in US from, said the number of rigs there had stabilised.

“I think $65 is the ceiling in the short term. Once oil prices get higher than that, the shale oil operators will start drilling again,” an analyst told StarBiz.

One of the reasons oil prices have recovered from a low of $46.59 per barrel in January was the fall in the production from shale oil and gas operators as indicated by the drop in the number of shale rigs utilised in the United States.

The efficiency among shale operators, however, has outstripped the number of rigs, bringing in more supply.

Another analyst also said oil prices wouldn’t sustain at those levels for too long as fundamentals appeared negative at large.

Related: Oil prices slip on dollar rally, ample supply

Petronas projects Brent crude to average at $55 per barrel for the whole year and the assumption is 18 per cent lower than current prices.

Deutsche Bank AG, Citigroup Inc and Goldman Sachs Group Inc said the recovery of oil prices from a six-year low earlier this year would not go on.

Deutsche estimated Brent to average $62.50 a barrel while Goldman expected prices to fall to $45 by October.

Goldman’s prediction was on the back of excess supply and the ease of getting loans in a liquid market.

On a brighter note, Japan and Australia’s stronger-than-expected economic data lifted oil prices yesterday. Japan is a major importer of crude oil and the latest data might indicate that demand ahead could be stronger.

Australia, on the other hand, saw better consumer sentiment after it lowered interest rates and taxes for small businesses.

But analysts said fundamentals in the medium term had not changed.

Energy companies including oil majors were shelving investments close to $100 billion worldwide, the Financial Times reported.

There are about 26 projects in 13 countries that are affected. These projects are located in countries like Canada, the United States, Norway, Kazakhstan, China and Australia.

“Factor in reduced spending on US shale and total upstream investment in countries outside Opec is expected to fall by about 22 this year compared with 2014,” the newspaper reported.

While Malaysia was not one of the 13 countries mentioned in that report, AffinHwang Research had downgraded the oil and gas sector to “underweight” on the opinion that the oil price rally would not sustain.

It said the strengthening of the greenback, weak global demand, and US inventory would pressure oil prices. As a result, oil and gas stocks listed on Bursa might track the movement of oil prices after a recent rally.

The research house has downgraded Petronas Chemicals Group Bhd and SapuraKencana Petroleum Bhd from “hold” to “sell” after the stock prices of both companies climbed.

PetChem lost 8 sen or 1.27 per cent to 6.21 ringgit (US$1.72) while SapuraKencana shed 6 sen or 2.21 per cent to 2.65 ringgit.

(3.60 ringgit = US$1)

This article was written by Ng Bei Shan from The Star, Kuala Lumpur, Malaysia / Asia News Network and was legally licensed through the NewsCred publisher network.