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No price boom to follow the bust according to the forward price curve

Published Tuesday, May 31st, 2016

The oil picture to the end of the year is confusing as far as the supply/demand balance is concerned. The most bullish of the monthly forecasting agencies is the IEA who forecast the requirement for OPEC oil at 33 mbpd over 3 and 4Q. OPEC puts the average call 500,000 bpd lower at 32.5 mbpd. It is reasonable to assume that Iran and Saudi Arabia will add at least another 500,000 bpd of production between them in the second half of the year which will take OPEC production into the 33 to 33.5 mbpd range.

So far, so good. These basic numbers suggest that, although the supply and demand balance will be much closer to equilibrium, there will still be a daily surplus over the remainder of this year. Then we have to factor in the big unknowns of the stability of Nigerian supply, the response of shale producers to higher prices and whether the political crisis in Venezuela will impact on production and exports. Dollar strength is another key unknown that affects prices directly and indirectly via its impact on emerging market debt and growth dynamics. Clouding the situation further is the huge stock build that has built up over the last 2+ years which, if released over a short period, would swamp the market. The caution reflected in the forward curve, which as of last Thursday’s close was pricing the balance of 2016 Brent strip at $50.58 bbl and WTI at $50.35, is understandable.

What about 2017? The IEA and OPEC will not be releasing their 2017 forecasts until July, which leaves only the EIA numbers to work with. It is forecasting the 2017 OPEC call 1.4 mbpd higher than in 2016 reflecting an increase in global demand, with non-OPEC supply falling by only 200,000 bpd. Adding this increase to the 2016 numbers of the IEA and OPEC gives an average 2017 call of between 32.9 (OPEC) and 33.7 mbpd (IEA). This looks far more promising for oil producers as long as OPEC do not push production towards 34 mbpd and shale oil production does not rebound.

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Posted by David Hufton