Oil prices may hit $50 per barrel next year

Over-supply is the major factor for bearish condition of crude oil prices and is expected to persist in 2015.

In an interview with Ajeet Kumar of Zee Media Corp, Vandana Bharti, AVP, Commodity fundamental research, SMC Comtrade Limited, shares her views on crude oil fundamentals and outlook.

How will recovery in US and Euro zone economy affect crude oil prices in 2015?

Well, US economy is expected to continue its recovery in 2015 but European Union may remain under pressure. Over-supply situation is the major bearish factor in the current situation and is expected to persist next year. As United States is now exploring sufficient shale gas, recovery in US is not going to give a surprise jump in the prices. However, it will help to stabilize crude at current level. But OPEC decision regarding production cut can influence prices in a bigger way.

Shale gas exploration is gradually getting trendier, how will it impact crude oil outlook?

It has created a major shift in the entire world economy by revolutionizing the oil fundamentals. OPEC, which was well known for dominating or influencing the crude prices, is now losing the grip. US shale gas is fulfilling the increased demand of crude and thus keeping a lid over the latter. If OPEC gets the consensus to cut production, only then we can see some price fluctuations, otherwise prices are expected to remain in negative territory.

Tracking better jobs report, expectations are growing louder that Fed may raise rates sooner than later. If it happens, how will the prices of oil be impacted?

If Fed increases interest rates then dollar index will appreciate resulting in more capital inflow into it. We know that crude oil and dollar index has negative correlation and incase dollar index rises then we will see more downside in crude oil.

What is your take on crude? What kind of range do you see forming in 2015?

It should be in bearish zone. In 2015, it can trade in wide range between USD 50-USD 90.

Will spread between Brent and WTI be widened/narrowed in 2015?

In 2015, this spread can hover in range of USD 1-USD 10 per barrel.

What are the major downside risks for the oil prices/Also mention the biggest upside triggers?

Major downside risks are:

Over supply situation; slow growth in euro zone, China and in other emerging economies, rising dollar index, OPEC inability to take decision for production cut, shale gas exploration, fear of interest rate hike in US and many more.

Major upside triggers are:

Ongoing geopolitical tensions, expectations that lower prices may increase the consumption, growth in US, India and other countries.

If OPEC gets consensus and goes for production cut in 2015, it would be the biggest upside trigger for crude. Further downside may compel refineries to go for lower supply in the market as it won’t be a profitable venture for them and in this situation prices may get support to some extent.

Will downside risks force OPEC to cut production to defend oil prices?

It is too premature to say. Actually, it was a price war earlier for OPEC. Hence, whenever it noticed sharp downside in the prices, it opted for production cut. Now, with the emergence of shale exploration and increasing share of non OPEC countries, it is not viable for OPEC to go for production cut.

It is the matter of power war due to which OPEC is now trying to maintain its production share even when the price is low. Russia's tensed relationship with the US and other western world countries over Ukraine is also influencing the oil price. Saudi Arabia is supporting US while maintaining its production level even when the prices are going southwards.