Now that the massive USO-driven squeeze appears to be over (congratulations to whoever managed to sell equity and their secured lenders) the bad news can return. First, it was Goldman slamming the "unsustainable rally, and then just a few hours ago, the EIA released its latest monthly short-term outlook report in which it brought even more bad news for long-suffering bulls who thought the pain was finally over.
Instead, the pain is only just beginning, after the EIA revised its 2016 supply forecast higher as "production is more resilient to lower prices than previously expected" - why thank you desperate momentum chasing "investors" of other people's money, who can't wait for that secondary offering to repay JPMorgan's credit facility.
The EIA also revised its forecast demand lower as a result of a decline in global economic growth.
Yes, someone finally admitted that demand is lower.
End result: a cut in forecast oil prices for 2016 and 2017 from $37 and $50 to just $34 and $40.
Here is the summary, with the troubling parts highlighted:
Global oil inventories are forecast to increase by an annual average of 1.6 million b/d in 2016 and by an additional 0.6 million b/d in 2017. These inventory builds are larger than previously expected, delaying the rebalancing of the oil market and contributing to lower forecast oil prices. Compared with last month’s STEO, EIA has revised forecast supply growth higher for 2016 and revised forecast demand growth lower for both 2016 and 2017. Higher 2016 supply in this month’s STEO is based on indications that production is more resilient to lower prices than previously expected. Notably, revisions to historical Russian data, which raised the baseline for Russian production, carry through much of the forecast. Additionally, lower expectations for global economic growth contributed to a reduction in the oil demand forecast.
And the details:
- Brent crude oil prices are forecast to average $34/b in 2016 and $40/b in 2017, $3/b and $10/b lower than forecast in last month’s STEO, respectively. The lower forecast prices reflect oil production that has been more resilient than expected in a low-price environment and lower expectations for forecast oil demand growth.
- Forecast West Texas Intermediate (WTI) crude oil prices are expected to average the same as Brent in 2016 and 2017. However, the current values of futures and options contracts suggest high uncertainty in the price outlook. For example, EIA’s forecast for the average WTI price in June 2016 of $35/b should be considered in the context of recent Nymex contract values for June 2016 delivery (Market Prices and Uncertainty Report) suggesting that the market expects WTI prices to range from $24/b to $58/b (at the 95% confidence interval).
- Global oil inventories are forecast to increase by an annual average of 1.6 million b/d in 2016 and by an additional 0.6 million b/d in 2017. These inventory builds are larger than previously expected, delaying the rebalancing of the oil market and contributing to lower forecast oil prices. Compared with last month’s STEO, EIA has revised forecast supply growth higher for 2016 and revised forecast demand growth lower for both 2016 and 2017. Higher 2016 supply in this month’s STEO is based on indications that production is more resilient to lower prices than previously expected. Notably, revisions to historical Russian data, which raised the baseline for Russian production, carry through much of the forecast. Additionally, lower expectations for global economic growth contributed to a reduction in the oil demand forecast.
- U.S. crude oil production averaged an estimated 9.4 million barrels per day (b/d) in 2015, and it is forecast to average 8.7 million b/d in 2016 and 8.2 million b/d in 2017. EIA estimates that crude oil production in February averaged 9.1 million b/d, which was 80,000 b/d below the January level
Breaking it down just for non-OPEC, or mostly shale:
- Non?OPEC Petroleum and Other Liquids Supply. EIA estimates that petroleum and other liquid fuels production in countries outside of the Organization of the Petroleum Exporting Countries (OPEC) grew by 1.5 million b/d in 2015, with most of the growth occurring in North America. EIA expects non-OPEC production to decline by 0.4 million b/d in 2016, which would be the first decline since 2008. Most of the forecast production decline in 2016 is expected to be in the United States. Non-OPEC production is forecast to decline by 0.5 million b/d in 2017.
- Changes in non-OPEC production are driven by changes in U.S. tight oil production, which is characterized by high decline rates and relatively short investment horizons, making it among the most price-sensitive globally. However, increases in production of hydrocarbon gas liquids (HGL) from natural gas plants and in crude oil production from the Gulf of Mexico partially offset lower tight oil production. Forecast total U.S. liquid fuels production declines by 0.5 million b/d in 2016 and by 0.2 million b/d in 2017, both less than the decline in crude oil considered separately.
So a 0.9mm b/d decline cumulatively being taken away from non-OPEC. The problem is that Saudi Arabia continues to report, there is a 3 million barrell excess supply every day; it also means that the market will remain oversupplied just purely on the OPEC side for the next 22 months! Basically, anyone hoping for a quick rebalancing in the oil market will be very severly disappointed.
Perhaps the only hope is that the EIA is massively wrong in its forecast. Here is its latest price forecast curve:
... and this is what the EIA "predicted" precisely two years ago.
Just a little bit off.