Bears Unconvinced by Oil Rebound, Expect Prices to fall to $10/Barrel

A 10 per cent rise in global crude prices in February forced state-run oil retailers to hike petrol and diesel prices for the first time in six months on Sunday. Brent crude quoted $63 per barrel on Tuesday, the highest since December 18.

The rebound in oil prices is bad news for consumers; it's also been noted by economists. India, which imports nearly 80 per cent of its oil needs, has been the biggest beneficiary of the crash in global oil prices; inflation is at multi-year lows and trade deficit narrowed to an 11-month low in January.

Moses Harding of SREI Infra Finance tweeted on Wednesday, "#Brent 40% recovery from $45 into $65 is not good news for #India economy (and financial markets); risk only beyond $65 to dilute optimism!?"

The big question everybody is interested in is whether oil hit a bottom after correcting about 60 per cent between June 2014 and January 2015. There's no consensus, but a majority of analysts attribute the rebound to short covering (purchasing a stock or commodity in order to close open position) rather than any fundamental shift in demand or supply scenarios.

64 per cent respondents in a Bloomberg survey dated February 7 expect the price of WTI crude to stay below $60 per barrel in 2015. West Texas Intermediate or WTI is the main benchmark for oil consumed in the United States, while Brent is used in Europe and Asia.

Bears are also not convinced about oil hitting a bottom yet. On Monday, US-based economist A. Gary Shilling forecast WTI crude prices to fall to as low as $10 to $20.

Mr Shilling based his prediction on weak rebound in US growth and slowdown in China, eurozone and Japan; eroding power of the OPEC cartel; and financial troubles in oil revenue-dependent countries such as Russia and Venezuela.

For Mr Shilling's prediction to come true, WTI crude will have to correct about 80 per cent from current trading price of $53 per barrel. Such a massive correction could send petrol prices in India to Rs 10- Rs 20 per litre from current Rs 57 per litre provided the exchange rate remains stable and the government does not hike excise duty or retailer margins.

Mr Shilling's forecast is the most bearish, but he is certainly not in a minority. Others who expect a sharp drop in oil prices include Citigroup ($20 a barrel), Goldman Sachs and Barclays (both expect prices to fall to $30 per barrel).

Market bears also pointed to a Reuters poll that shows US commercial crude oil stockpiles likely rose again in the week ended February 13 to record highs above 420 million barrels.