An oil worker turns a control wheel on a cluster well as pipework stands on the Russkoye heavy crude oil field, operated by Rosneft PJSC, in the Yamalo-Nenets region of East Siberia, near Novy Urengoy, in Russia. (Photographer: Andrey Rudakov/Bloomberg)

Big Banks Wave Goodbye to Hopes for Year-End Oil Price Surge

(Bloomberg) -- This was the week the oil-analyst community gave up hope.

From Bank of America Corp. to Citigroup Inc. and Societe Generale SA, banks that once predicted oil would end the year at $60 a barrel or higher now see prices barely managing $50. They place much of the blame on one target: OPEC.

Expectations were high at the start of the year after the Organization of Petroleum Exporting Countries and Russia reached a historic agreement to collectively reduce output and try to end a three-year surplus. Yet prices slumped into a bear market last week on signs the cuts aren’t enough to reduce the world’s bloated inventories, and that U.S. shale drillers are gearing up to neutralize their efforts.

“OPEC’s credibility has taken a big hit,” said Francisco Blanch, head of commodities research at Bank of America in New York. Having predicted two months ago that international benchmark Brent crude would reach $70 a barrel this summer, the bank now sees the grade averaging just $47 next quarter.

Brent traded at $47.68 a barrel at 12:11 p.m. in London, while the U.S. benchmark West Texas Intermediate was at $45.32.

OPEC’s Errors

OPEC made several key errors, according to Blanch. The group increased production late last year to maximize sales just before the deal took effect, swelling the inventory glut it sought to clear. It gave full exemptions to members Libya and Nigeria, who are now reviving production that had been curbed by internal conflict. The organization also underestimated the speed with which U.S. shale-oil drillers would respond to the supply cuts.

At Citigroup, head of commodities research Ed Morse said on June 26 it was no longer likely that Brent would exceed $60 a barrel this year. Investment funds have been “burned so badly” by long positions in crude that they’re unlikely to return even if the supply-demand balance improves, he said.

Goldman Sachs Group Inc., which in mid-December saw West Texas Intermediate crude averaging $55 a barrel in the third quarter, now sees the U.S. benchmark trading at about $47.50 in that period, according to a report on June 28 by analysts Damien Courvalin and Jeffrey Currie.

JPMorgan Chase & Co. also cut its forecasts. Oil analyst David Martin now projects Brent will average $50 a barrel in the third quarter and $52 in the fourth, down from estimates of $62 and $55 respectively made in late December.

Societe Generale SA lowered estimates on June 29, forecasting WTI at $47.50 a barrel for the third quarter and $50 in the fourth, according to a report by head of oil research Mike Wittner. In late December, those forecasts stood at $56 and $58.50.

While the banks have curbed their earlier optimism, they still see prices rising from current levels. Both Citigroup and Goldman said that crude is probably near the “bottom” of its likely range as OPEC’s curbs should eventually deplete inventories.

Not all analysts have even that much confidence in OPEC. The fourth-quarter Brent crude forecast of Commerzbank AG’s head of research Eugen Weinberg, who doubted the organization’s supply curbs would succeed, remains where it was in late December, at $48 a barrel.