Expect Brent crude prices to rise to $60/bbl in FY17: Barclays

Brent crude prices are expected to rise up to USD 60 per barrel in FY17, according to Miswin Mahesh, Energy Analyst, Barclays. Mahesh also said the gradual rise in crude prices are due to the outages in Nigeria, Canada and Columbia. When they slowly increase output, it could lead to a cooling effect on crude prices in the September quarter this year, he said.But, he said, demand and supply dynamics will soon be balanced and the return of these countries from outages is not going to affect prices for very long.Below is the transcript of Miswin Mahesh’s interview with Manisha Gupta on CNBC-TV18.Q: What is the sense that you are making? There are supply outages and Goldman Sachs has come out with a reversal in outlook and of course, the Canada issues just continue to go on.A: So, yes, in terms of crude oil at the moment, these unplanned outages especially in Nigeria are really spooking the markets. We are seeing close to a million barrels a day has been off the grid in terms of Nigeria. Most of the key grades like bonny light, forcados, these are grades of crude that refineries in India also purchase on a regular basis because these are good light sweet crude barrels and they are off the market. And that has led o the sudden tightness in the oil market. As you mentioned earlier as well, the Canadian wildfires are also still having an effect on some production.Although in our view, the Canadian tar sands production is not likely to linger on as much as the Nigerian outage oil. The Canadian situation will get better in the next 15-20 days if not less whereas the Nigeria one is looking like a more endemic one just because of the political situation there at the moment with the Niger Delta Avengers now saying or asking the government to give them a bigger share of revenues given that they are from the south, that is where all the oil is in Nigeria whereas the government is predominantly north focused.Q: So, what is your sense on how further higher can the crude oil prices go from here because almost everything sounds bullish. Of course, if you do not look at the Iran supply output which is expected to go on and those reports that at USD 50 plus levels, you will see a lot of exploration and investments come back here.A: A few angles here. Iran has been the saviour for the oil markets over the last two months because since the start of the year people were afraid that Iranian oil barrels would come back, would have a very cooling effect on oil prices, but they have actually managed to ramp up when the supply outages have taken place, the ones that we just mentioned – Nigeria, Columbia as well as Venezuela and Canada. And Iran has actually ramped up from close to one million barrels a day at the start of the year to 1.9 million barrel per day now. The oil minister has said that they will do two million barrels per day by May 20 and they will get to 2.2 million barrels a day which is their pre-sanctioned level – 2011, they were exporting 2.2 million barrels a day. So, their exports have climbed up and they have actually helped the oil market, if anything. Imagine if these Iranian oil barrels were not there. We would be in a much tighter market. So, we at Barclays have been calling for a very constructive market for a while now. We have published our upward bound report when crude was trading at USD 27-30 per barrel. And our price target has been USD 60 per barrel for 2017. So, we are slowly getting there, but given that this tightness is caused by unplanned outages and the fact that they can return back to the market, that does create a bit of uncertainty. If these barrels do return, whether it will be in the next three or six months, that will create a cooling effect on crude. But other than that, we are in step to balance, but there are risks on the horizon. As you mentioned as well, these US oil producers, they have been hedging as well quite actively over the last one week. And if prices do remain above USD 50 a barrel, they can return as well. Although, in terms of timing it takes a bit of time.Q: I just want to go on to another angle as well. I was reading a report which says more than 17 North American Exploration and production companies have filed for bankruptcy protection since the beginning of 2015. And almost 35 of them have done that in 2016 as well. And many more could be coming in. Where does that lead the sector then?A: Barclays has been saying for a while that this current price environment is not sustainable for many producers, especially the ones in the US. The ones that are highly leveraged with debt. And you are seeing a side effect of all this starting to play out in terms of the increasing bankruptcy that you mentioned. We could see an end to this possibly if crude trades above USD 65-70 per barrel again, but other than that, it is still likely to be a case where most of these producers, some of whom are still burning cash because of where crude oil prices are at the moment. They continue to suffer and again, part of the reason some of them have avoided bankruptcy as much in 2015 is because they were hedged. They were insured against oil prices falling, whereas in 2016, they are now much less insured than they were before. So, they get the real impact, so as to say.Q: So, what is your sense with the background of everything we have discussed? Where do you see the crude oil prices for this quarter and next quarter? Where do you see the year ending?A: For the second quarter, the one we are in at the moment, we have a Brent Price average of USD 46 per barrel. So, the price has moved towards where we have forecasted it to. Q3, we have USD 41 per barrel. A bit of a cooling there. We are factoring in some of these untimed outages returning, some of the global oil demand also looking a bit on the lower side. But, come Q4, we have USD 52 per barrel again. And in 2017 we have an average price forecast of USD 60 per barrel.