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Analisi 07.03.2017

Oil market commentary

Oil market commentary

Brent crude oil is struggling to move beyond USD57/bl since its rally last November when it rose +USD10.10 per barrel.


The market has turned “flat as a pancake” as Brian Gilvary, BP's CFO said. Oil is trading between USD52/bl and USD57/bl.

The market remains oversupplied despite steady global demand and OPEC/non-OPEC agreement to cut their production. A crude market that seems stuck in its current range reflects uncertainties surrounding draws on global oil inventories and the market’s efforts to rebalance.

OECD commercial inventories are still 280 MMbbl above their five-year average. The oil market’s rebalance could be delayed further if global supply increases strongly this year.

Global demand remains constant. IEA has revised up its estimation of 2016 demand growth and is forecasting a +1.4 MMbbl/d increase for 2017. Recent improvements in industrial activity in Europe and non OECD areas should support this.

Furthermore, the apparent inability of the crude market to break out from its current range is explained by risks emerging on the supply. There are two key principal drivers here and both relate to supply. Upward pressure is coming from OPEC crude output cuts while a downward push is the result of the recent recovery in US crude production.

Last January, OPEC’s production reached 32.3 MMbbl/d, down by 1.84 MMbbl/d from November production. If the January level of compliance among OPEC members is maintained, the difference between global demand and supply should reduce inventories by more than 0.5 MMbbl/d. Nevertheless, all of this depends on what will happen with Non-OPEC production where there is an expectation of a rise next year of more than 0.7 MMbbl/d in Brazil, Canada and the US. However, supply should actually go down in other non-OPEC countries, and the group's overall production should increase by only 0.4 MMbbl/d next year (IEA).

Investors continue to have a keen focus on US oil production, in particular shale/unconventional oil. During the last two years, the US accounted for 70% of the increase in OECD inventories. Currently, the rapid growth in the US rig count (+32% in the last three months) is increasing the risk of seeing higher than forecast US oil supply growth, with the consequence of delaying any rebalancing in the oil market.

Preliminary estimates indicate world supply fell 1.5 MMbbl/d in January; with January OPEC/Non-OPEC output ending below end 2016. OPEC supply fell by 1 MMbbl/d to 32.06 MMbbl/d (90% compliance). Non-OPEC production fell 0.22 MMbbl/d to 23.46 MMbbl/d. In 2017, OPEC expects non OPEC supply to grow by 0.24 MMbbl/d (from Brazil, the US, Canada, Kazakhstan).

In 2017, US total liquids output is seen rising 0.24 MMbbl/d; within that, OPEC expects US onshore output to remain stagnant at 7.3 MMbbl/d.  

Record OPEC compliance cuts, lower non-OPEC supply (excluding the US) and stronger demand growth will bring an end to the supply glut in the market.

In conclusion, there is a confident expectation of the market rebalancing in H217 which supports the reite¬ration of a six-month price forecast at USD 55/bbl- USD60/bbl.


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Erasmo Rodriguez
Energy and utilities equity analyst

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