Oil fundamentals have bottomed; have prices? – Deutsche Bank

FXStreet (Delhi) – Research Team at Deutsche Bank, suggests that in their view market balances have seen their weakest period and that a slow and steady process of US supply curtailment is well underway.

Key Quotes

“We have already seen a 440 kb/d decline in the US since July, although this was preceded and overshadowed by an OPEC increase of 1,400 kb/d between November 2014 and June 2015.

Gradual improvement towards a more balanced market in 2017 is likely even with the onset of incremental Iranian exports next year. Further declines in the US will offset the Iranian ramp-up, while underlying demand growth of 1.2 mmb/d will take up the slack of excess Saudi and Iraqi volumes.

Even if it is true that balances have seen the worst, market balances should remain weak for virtually the entire next year. Surpluses are most evident in the first half with an excess of +830 kb/d. Inventories will likely build once again over this period while we model the second half surplus at +177 kb/d.

This is a time when markets are normally undersupplied and global inventories typically draw down, however, so a ‘balanced’ second half may still be regarded as bearish. Last year, OECD inventories rose over the second half, defying the typical profile, and they are on pace to do the same this year.

While we believe any excursion of prices below the 2015 low would be short-lived, some uncertainty arises from the fact that producer support in the form of shut-ins would be unlikely, in our view. First, operating expenses per barrel of oil produced are quite low. We estimate that 1.92 mmb/d of global production becomes cash negative at a Brent price of USD30/bbl including 660 kb/d of low-volume stripper wells in the US. Second, producer shut-ins are unlikely to occur in this volume as there are myriad reasons to avoid the expenses of shutdown and eventual restart, such as the need to decommission older fields and the possibility of reservoir damage. The only scenario in which we could more reliably expect such closures is if producers become convinced that long-term real oil prices will remain below USD30/bbl, which is unlikely in our view.”

Research Team at Deutsche Bank, suggests that in their view market balances have seen their weakest period and that a slow and steady process of US supply curtailment is well underway.

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