Economist's faith in oil price rebound vindicated

Monday, Mar 2, 2015

THE STRAITS TIMES

MONEY

Economist's faith in oil price rebound vindicated

Published on Mar 2, 2015 1:57 AM

Dr Thierry Apoteker expects Brent to stabilise at around US$100 to US$110 in the next two years

By Mok Fei Fei

OIL prices have been climbing steadily since the end of January, a rebound that has brought some cheer to TAC Economics chairman Thierry Apoteker.

Not because the chief economist of the French-based research firm had bet big on the nascent rally that has taken the shine off naysayers' predictions that oil prices would stay depressed.

Instead, he can afford to breathe just a tad easier as he believes he has been proved right in his predictions.

At the start of the year, as oil prices languished in the doldrums with doomsday predictions of a plunge to US$20 a barrel, Dr Apoteker was the odd man out.

He forecast that prices would recover to US$70 in the first quarter and to US$90 some time this year, perhaps as early as the second quarter.

"I am smiling because when I had to defend our position to our customers, it was pretty difficult...

We are not completely sure about the timing, but we are completely sure about the direction."

If developments of the past few weeks are anything to go by, Dr Apoteker, who spoke to The Straits Times when he was in town recently to meet his clients, can rest easy.

Since falling from a height of US$115 last June to below US$50 in January, Brent crude has now moved above the US$60 mark.

Dr Apoteker's confidence in the oil price rebound stems from his take that global demand has not changed fundamentally.

The two largest economies in the world - the United States and China - are still big oil guzzlers, he noted.

The International Energy Agency has forecast that US oil consumption will increase 0.4 per cent this year to more than 19 million barrels a day, down from last year's 2.1 per cent hike.

China's demand, meanwhile, is expected to rise by 3.6 per cent to 10.5 million barrels a day.

An indication of the high US demand can be seen in the number of consumers buying oil-thirsty big automobiles like sport utility vehicles (SUVs) since oil prices started falling.

Major US automakers have been reporting a surge in the sales of trucks, a category that includes SUVs.

Bigger vehicles made up 54 per cent of all US automobile sales in January.

Automakers such as General Motors and Fiat Chrysler saw truck sales rise by more than 30 per cent in December, compared with overall sales that went up by 11 per cent against the same period a year ago.

"I always say jokingly that the US consumer is still half a child and half a grown-up. When things are good, they spend money. Consuming is a way of life in the US," Dr Apoteker said.

He added that the current oil oversupply situation is largely within the control of Saudi Arabia, which has the world's largest known oil reserves of more than 260 billion barrels.

Saudi Arabia, as part of the Organisation of Petroleum Exporting Countries, is determined to keep its market share by flooding the world with cheap oil.

This will flush out shale or "tight" oil producers in the US, who have been employing new methods of extracting oil known as fracking, Dr Apoteker said.

It is a game of who blinks first and it is unlikely to be the Saudis, whose oil production costs are estimated to be as low as US$5 to US$6 per barrel, compared with tight oil producers' cost of about US$65 to US$70 a barrel.

Dr Apoteker said: "The Saudis were shrewd, they saw that the oil industry in the US was weak because independent energy producers of tight oil are over-leveraged.

"They thought they would clean the market, get some of the independent energy producers into bankruptcy, create some sort of consolidation in the US energy market, which will then move prices up."

The economist expects Brent to stabilise at around US$100 to US$110 in the next two years.

"But I have to confess, we may be wrong - not on the downside - but on the upside, because of the demand from the US, which could grow more rapidly than previously expected."

feimok@sph.com.sg