Oil market inventory decline has been slow, but is set to accelerate in 3Q as Shale oil is recovering fast, but still see risks of a longer-term supply crunch with the lack of new projects elsewhere.
Key Considerations:
“Updating price assumptions: We continue to believe current crude prices are unsustainable, and have concerns over the lack of conventional non-OPEC supply beyond the next couple of years.
However, the weakness in recent prices coupled with the scale of growth in US activity has prompted us to update our crude price assumptions for the first time since January 2016. Our new assumptions are for average Brent prices of USD56/b in 2017 (vs USD60/b), rising to USD65/b in 2018 and USD70/b in 2019, vs our previous expectation of a return to USD75/b by 2018.”
“Look for bigger inventory declines in 2H: So far in 2017, despite good supply restraint from OPEC, evidence of a tightening market has been scant. Inventories have fallen more in harder-to-track areas such as floating storage, and the high-profile US data has not yet shown a decisive downwards trend. Global demand seasonality is set to add roughly 1.5mbd in 2H17 vs 1H17, while OPEC has now resolved to maintain its cuts through to end-1Q18. In combination, we think this points to a market tightening of c.0.8mbd in 2H, which could remove a material proportion of the global inventory excess by end-year.”
“2018-19 – balanced, with little spare capacity: If OPEC unwinds its cuts in 2Q18, the market looks broadly balanced, with demand growth offset by more OPEC supply, growth in US tight oil and the last of the conventional non-OPEC supply growth from the last spending peak. However, this does not necessarily mean a weak market. At that point, we believe OPEC spare capacity would be extremely limited apart from a potential recovery in supply from the likes of Libya and Nigeria, leaving the global system highly vulnerable to any other unexpected events.”
“Longer term – a tale of two cycles: OPEC’s late-2014 strategy was aimed at allowing prices to fall low enough to re-set global investment and push out higher cost output. The pace of the recovery in US short-cycle shale activity suggests that in that area at least, the impact of OPEC’s actions has been only temporary. The impact on the rest of non-OPEC supply could ultimately be more significant and longer-lasting, from a combination of mature field declines and a dramatic fall in new project sanctions. These effects will take some while to have an impact on global supply/demand balances due to the long-cycle nature of most major projects, but we expect a significant market tightening – and higher prices – towards the end of the decade.”
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