Experts question 'bleak' outlooks on global oil supply, US inventory

June 26, 2017
Evercore ISI’s Oilfield Services, Equipment & Drilling team reports a notable industry expert believes that the market will remain undersupplied for the foreseeable future.

Offshore staff

NEW YORKEvercore ISI’s Oilfield Services, Equipment & Drilling team reports a notable industry expert believes that the market will remain undersupplied for the foreseeable future.

The update follows a recent due diligence meeting between the group and with Andrew Gould, former chairman and CEO of Schlumberger, former chairman of BG Group, and board member for Saudi Aramco.

“We believe that [Gould] is one of the foremost experts on oilsupply trends, and given his vast experience with industry-leading O&G producers and service providers, we believe his outlook is particularly important now that crude markets have reached a critical, yet precarious junction,” Evercore explained in its note.

During this discussion,Evercore said Gould “noted his cautious optimism for supply/demand tightening, pointing to OPEC production cuts and an efficiency reversal in US shale as the basis for a sustained market rebalance.”

Althoughoil prices have rebounded some today (June 26), crude prices have revived a downward trend, which Evercore said it believed to be due to negative inventory numbers from the US Department of Energy, despite strong OPEC compliance and the reversal in shale efficiency.

The analyst firm said that one of its main takeaways from discussions with Gould was that, even with aggressive global growth estimates from the IEA,EIA, and OPEC, the market will remain under supplied for the foreseeable future. The key to a sustained supply/demand deficit is robust consumption growth over the medium term. Positive international macro solidifies the demand side of the market tightening thesis.

Additionally, it was pointed out that strong production cut compliance largely de-risked by a “whatever it takes” mentality from a few key players. Currently, Evercore continued, strong OPEC/non-OPEC compliance is led by two key participants: the Kingdom of Saudi Arabia and Russia. Consensus predicts that these countries will quickly revert to normalized production levels in 2018, but continued commitment from these two stalwarts provides supply-side upside to the market tightening thesis.

Another point addressed was a belief that 2018 will be the production growth “battleground” forNAM shale. Unless commodities exhibit a rapid turnaround, the analyst wrote that a combination of falling oil prices and rising service costs will likely force oil companies into lowering out-year growth guidance.

Finally, Evercore wrote that “[w]ith the market myopically focused on output from OPEC,Russia/FSU, and NAM shale, perhaps [Gould’s] most important remarks were those that addressed a fourth supply bucket. As [he] highlighted in his comments, around 26 MMb/d of non-NAM, non-OPEC, non-FSU production represents over 25% of global crude supply, and several years of severe underinvestment in this bucket could yield aggregate declines that actually outpace incremental shale growth.”

US crude storage

Relatedly, analyst firm, Raymond James, also released an update detailing its views on crude storage and inventory that took a different viewpoint of some of the recent data. Raymond James' J. Marshall Adkins wrote that "today's US crude inventory landscape remains both one of the most high profile topics, as well as one of the most misunderstood topics within the realm of the crude markets.

"WithUS production nearly doubling over the past six years, the amount of pipelines and storage tanks needed to facilitate the movement of that oil to the end markets has also skyrocketed (since this pipeline fill and associated tank storage at the end of the pipe is included in oil inventories).

"Given the fact that today, US crude inventories are driven more so by 'days ofproduction' than 'days of demand,' it only makes sense that US inventories are posting record highs (and should continue to do so longer-term)" Adkins wrote. 

He continued by discussing Raymond James' oil model, which counters views of inventory excess.

"While most market participants would paint a very bleak picture at the moment - likely suggesting that US inventories are at least more than 120 MMbbl higher than historical averages (~510 MMbbl vs. the 5 and 10-year averages of ~350 MMbbl and ~390 MMbbl, respectively), we would counter with the notion that the true 'excess' inventory figure is actually much more modest (closer to ~40-45 million bbls).

"Reaching this level of inventory in the near future is much more easily achievable than working down ~120-160 MMbbl of excess inventories. Based on our oil model, we see US commercial inventories falling below the 'right normal' level of ~465-470 MMbbl in the next 3-6 months.

We anticipate this should mark a strong inflection point for the crude market and drive oil prices and energy stocks higher," Adkins closed.