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Is crude oil between US$ 40-50 per barrel, the new normal? Yes, we think...

Persistently higher crude oil prices - over US$100/bbl until as recently as 2014 - made it lucrative for the 'expensive' shale oil production to thrive, building oversupply in the oil markets. The glut was exacerbated by the OPEC decision to not cut crude production as it opted to defend its market share rather than support prices by cutting down on production. This global oversupply and weakness in demand from the Chinese and Eurozone markets, have been responsible for pushing crude prices down. 

While strong demand growth at over 1.8 mbpd in 2015 helped soak up some of surplus supplies, it will take another strong super demand year to bring much needed equilibrium in crude oil prices. The International Energy Agency (IEA) now expect a sustained balance by 2017.

While lower prices have been a boon for importers like India whose current account situation markedly improved, oil exporters have been at the receiving end. So what next for the crude prices? Crude prices have staged a smart recovery from early 2016 lows of US$30/bbl, on the back of strong demand trend in the US, China and India. Also, supply disruptions in major markets like Canada because of wild fire and Nigeria because of pipeline attacks have caused disruptions of over 3 mbpd. Venezuela has seen lower supplies as power supplies were hit by drought like situation. Also, crude prices got a leg up from falling US shale supplies as tightening budget because of lower prices has hit volumes. While some crude oil supplies are likely to come back on stream, continued lower prices is likely to cut exploration budget which would hit future supplies. So crude prices, we think, are likely to stabilize at US$40-50/bbl which would prevent US shale producers from going bankrupt while simultaneously encourage new exploration capex for future.

Avishek Dutta is Senior Oil Analyst with a leading institutional brokerage based out of Mumbai, India

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