Tightening market buffered by abundant inventories
Oil price volatility remains high, with Brent crude having risen $17/bbl or 51% since our last macro outlook in January 2016. Since then we have seen supply affected by a 1.2mmbpd reduction in Canadian output due to wildfires, combined with underinvestment and instability-driven supply interruptions across OPEC members Venezuela, Libya and Nigeria. Some of these temporary supply effects will reverse over the coming months; nonetheless, we expect the oil market to tighten over 2016. Although record levels of inventory and uncertainty over the sustainability of emerging market demand growth may limit near-term price gains, longer term, we expect prices to rise to c $70/bbl in line with levels required to incentivise non-OPEC supply expansion. Our short-term oil price assumptions remain aligned to EIA STEO forecasts at $43/bbl Brent in 2016 and $52/bbl in 2017.
Rebalance underway
IEA short-term supply and demand forecasts point towards a market re-balancing over 2016, with the agency’s base case forecasts suggesting just 0.18mmbpd of oversupply in Q416. Stress-testing key assumptions including LTO output, Iranian volumes and emerging market growth suggest under all scenarios we should see a tighter market in H216 than H1. The precise timing of the inflexion point for sustained inventory draw-down is uncertain and a slow-down in emerging market growth rates could push this tipping point well into 2017.
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