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The crude oil market has been steady from the last couple of weeks, WTI futures for November delivery on the NYME rose 1.03% to $50.81 a barrel, with front-month Brent futures almost unchanged from last Friday at $52/bbl. Following a positive start to the week, on the back of headlines heralding Russia’s potential participation in the upcoming OPEC negotiations, prices have slipped back in recent days.
Authorized inventory reports from the EIA is due for release during US session, with analysts forecasting a stockpile build of 2.4 million barrels. OPEC reached an agreement to limit production to a range of 32.5 million to 33.0 million barrels per day in talks held late last month.
Mid-week data from the US government revealed the first week-on-week build in US crude stocks since late August, although the collapse in US refinery runs by 480 kbd w/w explains most of the shift in the crude inventories.
Elsewhere, preliminary Chinese import data showed another strong crude monthly import total of 7.9 mbd on a net basis, which is the second strongest on record, after February 2016’s level. Falling inventories in the US and elsewhere may represent the first real evidence that the oil markets is approaching a more obvious rebalancing phase, albeit one that would be in contrast to our current expectations for a small build this quarter.
If energy commodity markets to drift towards a period of sustained rebalancing then concerns arise as to how much longer would prices be more heavily influenced by storage economics and when would investment economics become more influential?
To consider this question we present two scenarios, looking at how demand and supply might evolve over the next five years if prices either stay close to current levels and conversely, where prices would need to increase to, in order to incentivize sufficient investment in new production, both in US shale assets, but also in conventional production to avoid excessive inventory draws in later years.
Contemplating the prices capped at $50/bbl (in real terms) results in a further deterioration in non-OPEC supply as project economics remain challenged and the addition to supply from new projects dwindles in the 2018-2020 period.
Under these assumptions, the crude market would likely generate ever greater deficits, as the limited investment would not only fail to offset mature field decline but also demand growth and post 2018, the cumulative shortfall in supply becomes too far-fetched to be sustainable and would create vigorous upside pressures on prices.
As the crude price behavior in consolidation pattern is foreseen, we uphold longs in April’17 WTI debit call spreads.
