Schroders upgrades crude to “positive”

The price collapsed because global supply increased sharply in 2014-15 while demand growth sagged – and more recently even stopped altogether. 


Geoff Blanning

Geoff Blanning

Why now?

The price collapsed because global supply increased sharply in 2014-15 while demand growth sagged – and more recently even stopped altogether. The Dollar’s super strength played a key role also. In the past 3-6 months, supply growth has been sagging as a direct result of the lower price, but now it looks like a strong bet that supply is actually going to fall, and fall sharply. As a result, the market is likely to come into balance very quickly. As this happens, the price will recover smartly.

Mark Lacey and John Coyle have been reporting how very recently a number of companies have announced further huge reductions in capital spending, lower production guidance or even shut-ins. In 2016 to date, a very small sample of companies have announced a combined cut in production guidance for this year of 160kbpd already, representing a 5-6% drop from last year. In the next fewweeks, as the rest of the companies report, we can expect similar announcements. From the initial sample, we can conservatively estimate a combined cut in production globally for 2016 of 1.5-2mbd, especially as the oil price is at least 20% lower than it was when the first companies reported. This reduction should be easily adequate to balance the market. 

Anecdotal evidence which points towards production declines is everywhere now. This is especially in the US and Canada but notably in other parts of the world too. India, China, Kazakhstan and Nigeria are all reporting declines. North Sea activity is coming to a standstill. Tanker rates from the Gulf have collapsed recently as there has been a sharp drop in crude cargoes for February loading. Oil is being shipped to the US from far and wide because the US domestic oil price is trading expensively to the rest of the world, but the premium is being maintained. The futures market contango did not worsen at all as spot prices recently swooned and in recent days it has been reduced. US E&P bankruptcies are soaring and the financial tap is being turned off. The evidence is plain that US production is falling faster than the official statistics report and the required oil is being “sucked” in from the rest of the world. This trend is going to accelerate as US production drops precipitously in the next few months.

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