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An upside scenario for oil

Published Tuesday, August 25th, 2015

There is normally a Warren Buffet quote for all seasons. “Be greedy when others are fearful” is perhaps the quote he would remind us of if asked about his current view of the oil market. Other non-Buffet quotes come to mind such as the more ubiquitous and anonymous “when you hit rock bottom, the only way is up”. Then there is the old trading adage that ‘when the bulls turn bearish’ it is time to buy. It is all doom and gloom at the moment for oil, suggesting that it is buy time on the Buffet principle.  Limiting our horizons to next year, can a reasonable case be made for the upside? We touched on a case that could be made in last Tuesday’s report. It is worth amplifying because it becomes more relevant as prices fall.

To get there it is helpful to start with the price Armageddon scenario:-

— Base case production without any additional barrels from Iran, Libya or Iraq runs at 32 mbpd throughout 2016. This is the level reported in the latest Reuters production survey which is not very different from the number estimated by the IEA. The IEA/EIA/OPEC consensus call is 30.30 mbpd implying an average daily 2016 surplus of 1.7 mbpd which compares to this year’s forecast surplus of 2.23 mbpd.

— If Iranian sanctions are lifted base case OPEC supply will rise by an average of at least 600,000 bpd next year. Currently dysfunctional Libya could add another 300,000 bpd on average to its current production levels and Iraq pushes through an additional 250,000 bpd. These additional barrels will take next year’s average daily surplus to close to 3 mbpd. Commercial tankage capacity, already 75 to 80% full, will be overflowing and strategic reserve capacity at tank tops. Distressed cargoes will float around like confetti and oil prices plumb the sort of depths not seen since the netback era.

to read the rest of the report, please click here

Posted by David Hufton