Ole Hansen
Saxo Bank’s head of commodity strategy Ole Hansen considers the implications of pledges by Saudi Arabia and Russia to raise oil production despite the likes of Iran and Venezuela not backing the move.
Article / 13 September 2016 at 9:49 GMT

Opec and IEA reports point to lower for longer

Head of Commodity Strategy / Saxo Bank
  • Experts confirm that oil glut will persist well into 2017
  • Slowing demand/resilient non-Opec production to blame
  • Oil markets will likely stay range-bound with limited upside
 Market blues – oil is hobbled by slowing demand and buoyant production. Photo: iStock

By Ole Hansen

Opec and the International Energy Agency have both released their monthly reports during the past 24 hours. What they both agree on is that the overhang of supply is likely to persist well into 2017 on a combination of resilient non-Opec production and slowing demand growth. This is likely to keep oil markets range-bound for longer and keep the upside limited.

The most surprising in Opec's monthly report yesterday was the revision of non-Opec supply from a deficit to a surplus next year. Within the last month they have changed the call from an expected drop of 150,000 bpd to an increase of 200,000 bpd. A lower than expected decline among US high cost producers combined with the startup of the long delayed  Kashagan oil field in Kazakhstan were cited as the main reasons. 

Oil prices have stabilised during the past few months and so has US oil production in the lower 48 states, which is primarily shale oil:

US lower 48 states production est.

This left the cartel's output of 33.24 mb/d in August some 750,000 bpd higher than the average amount the world will need from Opec in 2017. Adding to this is the risk of increased production, especially from Iran, Nigeria and potentially from Libya next year. 

The IEA has followed up with an equally glum report today. In it they cut global oil demand forecast by 200 kb/pd in 2H 2016 and throughout 2017. "Fading" stimulus from cheaper fuel, "economic worries in developing countries" and a "dramatic deceleration" in demand growth from China and India were cited as some of the reasons. 

IEA Global Oil Demand
As a consequence of these developments the IEA changed its view on the oil glut saying that instead of seeing the market balance this year, world oil stockpiles will now continue to accumulate for a fourth year through 2017. 

China and India, the engines behind global demand growth both faltered during the third quarter while supply from US high cost producers is expected to begin to recover during the second half of 2017.

As a result of these developments, crude oil is back on the defensive today after receiving a boost from the recovery in US stock market yesterday. 

We are likely to be stuck with the low $40s to low $50s range for the foreseeable future. Unless Opec and Russia find a very unlikely path to stem output when they meet in Algiers from September 26 to 28 the risk during the coming months seems to be skewed to the downside. 

Brent crude oil has settled into a wide and often volatile trading range during the past five months:
Brent Crude oil, first month cont.
Source: Saxo Bank

– Edited by Clare MacCarthy


Ole Hansen is head of commodity strategy at Saxo Bank

asousa27 asousa27
Thanks for article! You will do any long-term call this time?
Ole Hansen Ole Hansen
Crude will eventually trade back above $60 in order to attract the needed investment pick-up. The three major oil institutions continue to delay the timing of a return to a balanced market. On that basis we can still not see whether this (return to $60) will be late 2017 or well into 2018 at this stage.
Pandorra Pandorra
Many thanks for sharing, Ole. I'd like to be advised what's your thought for this medium term trade view, released by Steve O'Hare on Aug, 31 for CLX6 and Q4 at all.
Is it still in play?
asousa27 asousa27
Thanks Ole!
Ole Hansen Ole Hansen
Hi Pandorra. Steve's doing an excellent job in discovering trading opportunities. From a medium term prospective I'm on the same page as him. Short term there might be opportunities on the long side but i think we are yet to reach levels where i would contemplate entering one.
Pandorra Pandorra
Thanks Ole, I'm on the line. Still based on Daily ATR%(14) early June was the best time to short crude oil this year, even with some delay that is going on.


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