Oil: Market tightening ahead regardless of what OPEC does - HSBC

Even if OPEC reaches an agreement in Vienna, Research Team at HSBS, suggests that they would be surprised if it resulted in an actual reduction in output – particularly if volumes recover in Nigeria and/or Libya.

Key Quotes

“However, even without assuming any supply management from OPEC our model still implies a market which is fully balanced next year and gets increasingly tighter towards the end of the decade. This is despite assuming below-consensus demand growth, continued growth in OPEC output and a sharp recovery in US tight oil production from 2018 onwards.”

“In fact, the latest data on US and OECD oil inventories show that stockpiles have actually fallen somewhat in recent months, which suggests that the market might be closer to balance than most think. Applying average historical seasonality factors to our supply and demand forecasts implies that the market might still be in surplus through 1H 2017, but that inventories would fall materially in Q3 and Q4. Our numbers also indicate that the market would return to immediate balance if OPEC successfully curbs output to within its proposed 32.5-33.0mbd range.”

“Once the period of oversupply comes to an end we think the market’s focus will shift to the very low levels of spare production capacity in the global system. With most OPEC members now pumping flat-out, we see the group’s effective spare capacity potentially falling to as little as 1% of global demand next year, leaving the market much more susceptible to unexpected interruptions.”

“In a slightly longer-term perspective, we think OPEC shares our concern that the current hiatus in global upstream investment can have a severe impact on future security of supply. OPEC alluded to this growing risk in the communiqué following the Algiers meeting in September, and the Saudi oil minister has said that the attempt to speed up the market rebalancing is a signal to the industry to start investing again. The peak in global oil demand still looks a long way off and the scale of unsanctioned supply needed to balance the market in the coming years is immense. This supports our view that higher prices are required to either stimulate a recovery in investment and/or a moderation of demand growth.”