Crude oil price facing downward pressure, will drop below $60 a barrel before year-end, says KPMG’s Regina Mayor

Twesh Mishra New Delhi | Updated on November 13, 2019

Regina Mayor, Global Sector Head and US National Sector Leader of Energy & Natural Resources, KPMG

Crude oil price is facing downward pressure with the OPEC World Outlook assessing more US shale production as well as the recent discovery announced by Iran. According to Regina Mayor, Global Sector Head and US National Sector Leader of Energy & Natural Resources, KPMG in the US, the outlook for crude price remains bearish. Speaking to BusinessLine, Mayor said the two announcements provide further downward pressure on Brent. Excerpts:

What is your outlook for crude oil price movement in light of the OPEC World Outlook as well as the recent Iranian find?

My outlook for crude price remains bearish. If anything, these two announcements provide further downward pressure on Brent and I believe it will drop below $60 before the end of the year and stays there through the first half of next year.

This is because crude is finding its way to the market (for example from Iraq).

I don’t buy OPEC’s bullish pronouncement on shale output (estimated at 17 million barrels per day by 2024). I believe shale will grow, but not as extensively. The good news is that OPEC recognises that shale is a long-term phenomenon and not a production blip. But, we are seeing production in the US slow and this year should remain flat.

Permian rig counts are continuing to slide and the lack of access to capital by a number of players will have a material effect...It is generally believed that US technological innovation, which has powered tremendous production growth, is at the point of diminishing returns. The ongoing technical innovation is presumed to deliver incremental, not exponential growth.

How will the current price augur for the Saudi Aramco IPO? Do you think this is a good range to sell stake in Saudi Aramco?

I think it is less about what price and more about what value they can get in the market. There has been so much talk about the potential of the IPO that there is only so much time before you finally pull the trigger, otherwise the market is just going to shrug it off. The time to monetise is now, and they are still talking about significant valuations that your average oil company would be delighted to have a shot at.

Even at $60 or $70 a barrel of crude oil, it is still the most profitable company in the world…

By a long shot. They have been public with their financials and its amazing results that they are able to produce. But I think their country wants to monetise that asset and then be able to plough those resources back into benefitting other sectors in the country.

Do you see a shift from crude oil? After the attack in Saudi Arabia, the blip was not substantial, what does it reflect for the global energy supply chain?

The market shrugged off the fact that 5 per cent of global oil supply went off line. It (the price) spiked 12 per cent in a couple of days and then it went back down. I think the market has been under reacting to supply side risks. I don’t see that as an indicator that we don’t need oil. I didn’t tie those two things together.

I do think that the markets have overly priced in demand side risk, the concerns about China and even India and have under and estimated supply side risks like the drone attacks in April and then the attack in September.

There is more bullish sentiment coming back in the market from where I sit in the US and I am bearish, I think prices stay relatively low for the next six months.

Is there a range you would like to say the crude price would remain in?

I think Brent stays in the high fifties for the next four to six months and then maybe we’ll start to see more upward pressure to push it into the sixties. But I do not see any big price bumps.

Do you see production cuts affecting or making the change they are supposed to bring about?

I think OPEC in December will be pretty aggressive relative to sticking with its cuts and maybe even trying to go lower. I think its fascinating that they are inviting Brazil to come to the table. Brazil’s production dwarfs many of OPEC’s numbers.

I think its a really smart move for them to try and stay relevant as they try to manage the price in the $50-60s a barrel kind of environment.

How does the present price augur for shale production? Do you think it is a comfortable range, if it goes any lower, will we see a lowering of shale production as well?

Right now, it is a very uncomfortable price level for shale producers and the US investor community is being very aggressive against shale players. So their access to capital and financing is drying up.

Published on November 13, 2019

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