Oil prices lower but may see upside later in the year on inventory draws: Analysts

Where oil prices are going

There may still be upside for crude oil prices even if the market appears to be let down by a production cut extension by the Organization of the Petroleum Exporting Countries (OPEC), analysts said Friday.

On Thursday, OPEC announced it would extend cuts in oil output by nine months to March 2018, after November's landmark deal failed to clear a global supply overhang.

The market was disappointed, sending prices nearly 5 percent lower overnight as investors were anticipating deeper cuts.

"This is a bit of an overreaction. Markets are heading towards more rebalancing in Q3 and Q4 of this year ," said Wood Mackenzie's research director for Asia refining, Sushant Gupta.

Crude oil futures were lower on Friday in Asia at 1.20 p.m. SIN/HK time with U.S. West Texas Intermediate and European Brent 0.7 percent and 0.5 percent lower at $48.55 and $51.18 a barrel respectively.

After OPEC's production cuts, Wood Mackenzie expects global supply to increase about 200,000 barrels per day while demand grows at 1.3 million barrels per day, Wood Mackenzie projects.

"There (will be) a meaningful drawdown in inventories," said Gupta.

Higher oil prices at year-end?

Oil prices will likely be lifted in the last two quarters of 2017, Gupta added. Wood Mackenzie expects international Brent to average $55 a barrel this year.

That oil prices were falling after OPEC's decision reflect's the oil group's mismanagement in communication as it telegraphed the extension well in advance, allowing for profit-taking now after earlier gains, said Bordier and Cie's Chief Investment Officer, Bryan Goh.

"Physical markets are moving into balance. We now have three weeks of combined inventories draw in crude, distillates and gasoline so fundamentals speak of faster rebalancing in the market," Goh told CNBC.

A laborer works at the Nahr Bin Umar oil field, southeast of Baghdad, Iraq.
Essam Al-Sudani | Reuters

Goh also expects higher prices later in the year, as does JBC Energy Asia's managing director, Richard Gorry.

However, OPEC is going to have to deal with the same overcapacity problem again even if an inventory drawdown will help the market in the second half of the year, Gorry told CNBC's "Capital Connection." OPEC will need to continue to manage the market, he added.

"The depth of cuts is fine...however, the length of cuts is not going to be significant. Oil markets are going to be grossly oversupplied in 2018 without OPEC action. They will be oversupplied in 2019 without OPEC action," Gorry said.

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