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DNB Bank revises down global crude price forecast

Hydrocarbon Engineering,

Leading oil analyst Torbjorn Kjus of DNB Bank has revised down the oil price forecast for 2015 to US$ 80/bbl. This is a large downward revision of US$ 20/bbl compared with DNB’s prior US$ 100/bbl forecast.

Kjus reports that it felt quite bearish to launch a US$ 100/bbl Brent forecast for 2015 in the summer of 2012 after having seen Brent prices climb higher almost constantly since the millennium change and even reach above US$ 125/bbl during the spring that year. The average price for 2012 became US$ 112/bbl (the highest ever recorded) and as such to predict an average price drop os US$ 12/bbl for the next few years was seen by many as aggressively bearish. It now looks as it that forecast was far from being bearish enough.

When the Brent price was US$ 115 in June, the bank maintained its bearish forecast for the second half of the year at US$ 107/bbl for Q3 and US$ 105/bbl for Q4. It turned out that prices came in much weaker than that for Q3 (US$ 103.5/bbl), and for Q4 DNB holds that the average price will now be as weak as US$ 85/bbl. If that Brent price were to materialize for Q4 then the average price for 2014 will be quite close to the original forecast for 2014 of US$ 102/bbl, which the bank published on 10th December 2013. The DNB price deck for 2014 was too low for the first half of the year but too high for the second half of the year, but the average looks to be hitting quite well.

The target with any forecast is to hit correctly on the direction of the market and that the price change materializes for the right reasons. If you for example are bullish to oil prices because you believe supply growth will falter in US/Canada/Brazil, and that demand growth will be much stronger in China/India/US than others believe, and instead the price increases because Venezuela falls apart, it is not much to be proud of to hit correctly on the price movement. The story behind the forecast is often more important that the price deck that is the end result.

DNB Bank has said for the past two years that the direction of oil prices will also be down in 2015, but now analysts hold that the price drop will be much more severe than previously predicted. They are revising down their average Brent forecast for 2015. This implies a large downward revision of US$ 20/bbl for 2015 and US$ 13/bbl for 2016. DNB analysts are not sure if those numbers are low enough to unleash the much lower growth in US oil production that will be required to balance the oil market for the next two years, but for now they are sticking with those numbers.

A key premise for this price scenario to play out is that OPEC is unwilling to remove more than at most 0.5 million bpd from the market. If that assumption changes DNB will be forced to adjust its price forecast higher, but so far there are no signs that Saudi Arabia will aggressively cut production to defend oil prices.

After 2016, DNB believes that the Brent price will rise back up to US$ 95/bbl for 2020 as the supply growth will weaken and demand growth will pick up with lower prices. Lower expected investments in the oil industry over the next couple of years will also set the stage for higher prices further down the price curve. Hence, DNB will not be revising down the longer term forecast for 2020.

Adapted from a press release by Emma McAleavey.

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