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City brokers upbeat on short-term oil price but still wary

Goldman Sachs pulls forward price forecast for US light crude to US$45 a barrel in the second quarter
City brokers upbeat on short-term oil price but still wary
The price of a barrel of Brent crude has hit US$48 a barrel from less than US$30 earlier this year

Oil demand may have risen in the short term, jacking up prices, but analysts from some of the City’s top investment banks are wary further out.

Prices have recovered from US$26 a barrel in February as oil pipeline attacks in Nigeria and wildfires in Canada have disrupted production.

At just after midday in London, the price of a barrel of Brent crude had advanced 2.1% to US$48.9 and US light crude was similarly up at US$47.2.

The bounce-back in prices has prompted big institutions to take a favourable view of the near-term outlook, but to remain more cautious.

Goldman Sachs said the oil market had gone from nearing "storage saturation" to being in deficit “much earlier than we expected.”

The broker said it was pulling forward its price forecast for West Texas Intermediate (WTI) to US$45 a barrel in the second quarter of 2016 and US$50 in the second half.

“However, we expect the return of some of these outages, as well as higher Iran and Iraq production, will more than offset lingering issues in Nigeria and our higher demand forecast,” Goldman analysts said in a note.

The broker said it therefore expected a more gradual decline in inventories in the second half than previously and a return to surplus in the first quarter of 2017.

This prompted it to lower its 2017 forecast, with prices in the first quarter of 2017 at US$45 a barrel and only reaching US$60 a barrel by the fourth quarter of 2017.

Bank of America Merrill Lynch (BofAML) said cyclical factors in the market were improving, oil supply was falling and demand was rising.

That led it to expect WTI to hit US$54 a barrel by the end of the fourth quarter of this year and to average US$59 a barrel during 2017.

But BofAML said it still expected WTI to drop to US$39 a barrel by the end of the third quarter.

“While we retain a constructive outlook on the back of a strong demand backdrop and falling supplies, oil prices tend to exhibit a negative bias in the third quarter,” BofAML analysts said.

“Spec oil positions seem to follow a seasonal trend too. Admittedly, Brent Crude Oil prices peaked last year on May 6 and then followed a seasonal down trend.

“We see few reasons to think this year will be any different.”

But it added: "Still, supply disruptions are very elevated and uncertainty in Nigeria, Venezuela or Canada may impact oil prices both ways.

"On the one hand, supply disruptions may ease as wildfires in Alberta come under control, exacerbating the seasonal price decline.

"On the other, the precarious political and economic situation in Venezuela or Nigeria could lead to more unexpected output losses, curbing the downward seasonal pressure on prices."

Barclays said the second quarter may well be better than the first in terms of industry prospects.

"Despite the clear difficulties across the sector in Q1, it may well prove to be that the old adage of "it is darkest before the dawn" is correct," the broker said.

"The second quarter has already seen somewhat of a recovery in the oil price and this combined with continued focus on cost discipline should start to see a rebalancing of cashflow, capex and dividends over the coming 18 months.

"We remain positive on the sector with BP (LON:BP.) (price target 550p) our top pick."

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