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Oil Market Summary: A Fragile Recovery

Core Content

This report discusses the current state and outlook of the global oil market as of June 15, 2016. It highlights the ongoing production disruptions, the resilience of production in non-OPEC countries, and the mixed signals from demand growth. The overall conclusion is that the price recovery is fragile and dependent on continued disruptions or other catalysts to sustain higher prices.

Main Points

• Production Disruptions:

  • Production disruptions have increased, with Canada and Nigeria being key contributors.
  • Canadian wildfires extended beyond expectations, leading to a loss of 34 mb/d of production.
  • Rebel attacks in Nigeria have intensified, with an estimated 610 kb/d of production impacted in June.
  • Venezuela's production disruptions are also present, though official data shows only minor declines, with potential for larger drops due to logistical and financial issues.

• OPEC Production:

  • OPEC production outside of Venezuela and Nigeria increased by 225 kb/d in May.
  • Iran's production rose by 100 kb/d, indicating upside potential for the market.
  • Saudi production rebounded to 10.2 mb/d in May, with further modest recovery expected.

• Non-OPEC Production:

  • Non-OPEC production, excluding the US, is expected to decline by 430 kb/d this year.
  • The US production decline is gradual, with the potential for stabilization if prices remain above $50/bbl.
  • The US has a significant backlog of drilled but uncompleted wells, which could add 0.5 mb/d of production over the next 18 months.

• Demand Outlook:

  • Demand growth in 1Q16 surprised to the upside, but recent data suggests a slowdown.
  • China's demand growth is expected to remain resilient, though concerns over the effectiveness of recent stimulus measures are present.
  • India's demand growth remains strong, while Latin America's demand is influenced by drought and diesel generator use.

• Market Balance:

  • High-frequency inventory data suggests a tighter market, but this is attributed to strong Chinese demand rather than a global deficit.
  • The report notes that visible stock changes reflect the pull from China, not a true market deficit.
  • A return to balance is expected by the end of 2017, with a potential surplus in 1Q17.

Key Information

• Price Forecast:

  • The 3-month WTI forecast is $49/bbl.
  • Prices are expected to remain in the range of $45–$50/bbl in the coming months.
  • A sustained deficit in 2H16 is anticipated, but this depends on continued disruptions or other catalysts.

• Investment and Activity:

  • Producers are showing signs of increased activity at current price levels, with the potential for a pick-up in brownfield investment.
  • The rig count in the US has increased for two consecutive weeks, the largest recovery since last August.
  • The rig count increase in the Permian Basin has had a limited impact on production.

• Regional Highlights:

  • Brazil: Production rebounded in May, with Petrobras output up 6% from April.
  • North Sea: Production has remained resilient, with loadings near two-year highs in July.
  • China: Strong demand pull is influencing global inventory trends.
  • Refinery Outages: Outages in Canada and France have offset some of the production losses.

Conclusion

The oil market's recovery is described as fragile, with the potential for prices to remain in the $45–$50/bbl range unless additional disruptions occur or demand growth strengthens. The report suggests that while the market may be close to balance in June, a true deficit is not expected until 2H16. The balance is influenced by factors such as Chinese demand, OPEC production, and non-OPEC maintenance drilling. The report also highlights the importance of monitoring inventory trends and regional production dynamics for future market direction.

Exhibits Overview

• Exhibit 1 & 2: Highlight the increase in production disruptions in Canada and Nigeria.
• Exhibit 3: Shows the contrast between Canada's production recovery and Nigeria's ongoing disruptions.
• Exhibit 5 & 6: Reflect OPEC production growth and non-OPEC production resilience.
• Exhibit 7 & 8: Indicate that prices are above budget for many non-OPEC producers and that the rig count has increased for the first time since September 2015.
• Exhibit 15 & 17: Discuss demand growth in India and China, and the impact of Chinese demand on global inventory trends.
• Exhibit 18 & 19: Highlight the decline in Asian refining margins and the offsetting effect of refinery outages in Canada and France.

Disclosure

• The report is produced by Goldman Sachs Global Investment Research.
• The views expressed are personal and not influenced by business or client relationships.
• The report is for clients only and is not a personal recommendation.
• It is important to note that the price and value of investments may fluctuate, and past performance is not a guide to future results.