Oversupply short term, lower break-even long term
The oil markets have been in turmoil now for 16 months, with January 2016 trading the most tumultuous we have seen in years. Crude prices have plummeted to levels not seen since mid-2004 and both slowing Chinese demand growth and Iranian exports are weighing heavily on the market. We align our short-term forecasts to the EIA, which does not expect a reversal in inventory builds until H217. This reduces our forecasts for Brent in 2016 and 2017 to $40/bbl and $50/bbl respectively. Longer term, a fundamental shift in costs is likely to result in a lower break-even for marginal cost producers; this sets the base for our long-term oil price assumption. As a result, we reduce our long-term Brent assumption from $80/bbl to $70/bbl.
Oversupply to remain in the short term
Barring a reversal of the Saudi-led OPEC market share protection strategy, it appears highly likely that the global supply glut will continue for at least another 12 months. The US Energy Information Administration (EIA) in its recent Short-Term Energy Outlook does not expect inventory draws until mid-2017 at the earliest, and ongoing cost deflation that continues to keep marginal economic fields in production could extend this supply overhang further. Reduced Chinese demand growth and the impact of lifting sanctions on Iran are adding to the oversupply fears and downward pressure on prices.
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