IEA's monthly Oil Market Report

[dan_s]

"Oil at $50/bbl is a powerful driver in rebalancing the global oil market, but the big question is just when will equilibrium be restored. To be sure, the world is using more oil and high-cost supply - primarily non-OPEC - is being forced out. But a projected marked slowdown in demand growth next year and the anticipated arrival of additional Iranian barrels - should international sanctions be eased - are likely to keep the market oversupplied through 2016."

Read: https://www.iea.org/oilmarketreport/omrpublic/

For now, lower oil prices are supporting strong demand growth. The world's top consumers, the US and China, are buying more oil - boosting growth this year to a five-year high of 1.8 mb/d, a leap on paltry gains of 0.5 mb/d in 2Q14 when oil was in triple digits. But the outlook for oil demand growth is looking softer next year. The International Monetary Fund, in its latest World Economic Outlook, cut 0.2 percentage points from 2015 and 2016 economic growth, with big markdowns in oil-dependent economies, such as Canada, Brazil, Venezuela, Russia and Saudi Arabia. The stimulus from lower oil prices is also expected to fade next year with oil demand growth set to slow by 0.6 mb/d to 1.2 mb/d.

The previously relentless growth in non-OPEC supply is also shrinking fast. Although Brazil and Russia pumped at record rates in August and September respectively - pushing non-OPEC output nearly 0.7 mb/d above a year ago - that is down from gains of 2.7 mb/d in December 2014. Supply in the US - which had been the motor of growth - is already sinking swiftly: year-on-year gains have eased to just 0.3 mb/d from 1.6 mb/d during the first quarter. Total non-OPEC output next year is expected to contract by nearly 0.5 mb/d as global upstream spending cuts of more than 20% impact both new projects and existing production. A remarkable decline in costly infill drilling, required to stem declines at producing fields, is already evident with rates in some areas dropping by more than 50% so far this year - nearly double that seen in previous downturns.

Even low-cost OPEC producers are tightening their belts. Spending curbs and a severe financial crisis are limiting supply growth in the near term in Iraq, which now ranks as the world's fastest source of additional supply. Production from neighbouring Iran could be on the rise once it is released from international sanctions and ramps up towards 3.6 mb/d from 2.9 mb/d currently. How quickly Iran can bring those extra barrels to the market will make a big difference to 2016 dynamics. [I believe a lot of the increase in Iraq exports is real Iranian oil being smuggled out since Iran is in full control of Iraq today. - Dan]

Rising geopolitical tension, such as Russia's military intervention in Syria, is back in the frame, even if the present global oversupply is tempering the market's reaction. These moving pieces are creating uncertainty. Estimates of 2016 demand growth from a selection of leading forecasters swing by 0.6 mb/d, non-OPEC supply by 0.8 mb/d and the resulting "call on OPEC" by a hefty 1.0 mb/d. Some of this uncertainty may start to clear next year although, considering Iran, the market may be off balance for a while longer.

[dan_s]

I was expecting a more bullish report this month from IEA. There are so many moving parts and with Russia entering the "playing field" in the Middle East it is impossible to predict what will happen in 2016. Regardless, supply & demand are moving back into balance. IEA thinks the oil market will be balanced at the end of 2016. I believe U.S. oil production declines will accelerate in the 4th quarter and the global market will balance by mid-2016.

[mkarpoff]

What, in your opinion, would the approximate price of oil be when the market is "in balance?"

[dan_s]

$75/bbl, assuming the U.S. dollar stays elevated. (See: http://www.marketwatch.com/investing/index/dxy/charts ) About 20% of the drop in oil prices is a direct result of the spike in the U.S. dollar.

The upstream companies will do very well at that price. Drilling & completion costs were coming down before the big drop in oil prices. Some of those costs will go up with higher fuel prices, but some will stay. As the shale plays "mature", operators go to pad based development drilling which is much cheaper.

Keep in mind that if WTI spiked to $75/bbl tomorrow, it will take a year for oil production in the U.S. to grow again. It will take months to organize the capital, equipment and people to ramp up drilling programs. The longer oil prices stay low, the longer it will take to ramp up activity again.

This industry has a long history of "over-shooting" on both the upside and downside of price cycles.