FXStreet (Delhi) – Research Team at HSBC, suggests that following the 60% drop in crude prices since mid-2014, the market seems to be fixated on the risk of further falls.
Key Quotes
“This is understandable given a backdrop of firm supply pressure from OPEC, large inventory overhangs and the potential for increased Iranian exports next year. However, we believe investors should be increasingly concerned about the risks of a sharp move higher in crude prices. Not only should the extent of oversupply fall dramatically in 2016, but low spare capacity within OPEC means that buffers against unexpected supply disruptions are very limited. Moreover, if OPEC abandons its policy and reduces output, prices could well rally considerably. As far as tail risks go, they seem skewed firmly to the upside, in our view.”
“Producers outside OPEC have responded much more quickly to lower oil prices than the market was expecting. The most striking evidence of this is the relentless series of downgrades to non-OPEC supply growth estimates. Looking at the monthly evolution of the US Energy Information Administration’s (EIA) forecasts, 2016 non-OPEC supply growth was seen at 0.8mbd in February. Just nine months later, the forecast points to a y-o-y decline of 0.3mbd. The International Energy Agency (IEA) sees an even larger fall of 0.6mbd, which would be the largest annual decline in non-OPEC output since 1992 (when the collapse of the Soviet Union resulted in a 1mbd contraction). According to the IEA, non-OPEC volumes grew 2.5mbd as recently as 2014.”
“The biggest supply response thus far has come from US tight oil production, which has a much shorter production cycle than conventional oil extraction. The US onshore rig count has fallen sharply by 66% since the peak in Q4 2014, and the full effects of this have only recently started to translate into falling production. On our estimates, liquids output from the main US onshore plays should fall around 650kbd y/y in 2016. However, it’s important to remember that US tight oil only accounts for around 5mbd out of total non-OPEC supply of nearly 60mbd. Large project deferrals and cancellations will only impact supply some years down the line, but decline rates from existing production are likely to rise in the near term as the industry cuts back on maintenance capex such as infill drilling.”
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