Most commodity traders are currently asking themselves the question, how long will it take for the oil industry to work through the current period of oversupply and re-balance itself? The answer seems to be; not any time soon.
Current supply imbalances are such that oil production is effectively running two years ahead of demand. Declining U.S. oil production during the next several quarters will help reduce global oversupply, but that alone cannot quickly fix the current global imbalances.
For the market to return to normal before 2017 and for prices to respond accordingly will require the following to occur:
- Saudi Arabia to reverse course from its “maintain market share at all costs” approach and cut production
- Global demand to exceed the current expectations of 95 million barrels per day in 2016 and 96 million barrels per day in 2017
- A major geopolitical event such as political upheaval in Venezuela or another oil exporting nation
Without one or more of these events occurring lower oil prices for longer seems inevitable.
Assuming OPEC forecasted volumes remain flat, the two critical variables for determining when the industry will reach a re-balancing point become growth in demand and U.S. production.
Demand is currently projected to grow by more than 1% in 2015-17, as slowing but still growing demand from China is being offset by healthy growth elsewhere in the world.
In terms of US production, September output is expected to be 600 million barrels per day, or 6%, lower than the 9.6 million barrels per day peak levels reached in March and April. Assuming rig counts will fall further, US oil production will continue to fall, declining by 8% in 2016. This is quite a fall given U.S. oil output will have grown 25% during 2014-15.
The long term oil price forecast is $70 for Brent in 2017. In the meantime, it’s plausible that oil prices will range between $40 and $60 per barrel for the next one to two years.