Turning Point

OPEC says that next year will be a turning point for oil towards a more balanced market and we will be at a turning point for the world as the US elects a new President. As OPEC raises its demand forecast, oil starts to price in a Hillary Clinton presidency that will lead to more regulation and ultimately higher prices. While Donald Trump may still pull off an upset, the markets seem to suggest it will be Hilary that will win, leading to a doubling down on the war on domestic oil and coal production.

OPEC Is bullish on demand in their World Oil Outlook and predicting that global demand will hit a record 95.3 million barrels a day next year. That increase comes as OPEC says the oil market has shown signs that it is heading towards a more balanced situation but added that volatility continues and challenges remain on several fronts. They also raised their price forecast for demand in 2018, 2019 and 2020, when they see demand reaching 98.3 million barrels a day, or 900,000 more than the group projected in December.

OPEC said that global stock levels have recently leveled out, but remain well- above their five-year average. And while global spending on exploration and production by oil and gas producers is expected to fall slightly less this year, the combined amount over the two years still equates to a loss of more than $300 billion. This will impact not only new projects coming onstream, but new discoveries too. In other words, non-OPEC production will fall.OPEC says that non-OPEC supply will decline in the period 2016–2017 before slowly rising again to 2021. It is expected to rise from 56.9 mb/d in 2015 to 58.6 mb/d in 2021, an increase of 1.7 mb/d. In the long-term, non-OPEC supply again rises steadily, but it is expected to peak at 61.4 mb/d in 2027, before dropping to 58.9 mb/d in 2040.

OPEC says that it is important to highlight that the medium-term outlook to 2021 is 99.2 million barrels a day (mb/d), which is 1 mb/d higher than that assumed in last year’s outlook. This is the result of a lower medium- term oil price assumption, which is expected to have a stronger influence than assumptions of lower medium-term economic growth and expanded energy efficiency policies. But in the long term, additional energy efficiency measures and the potential for new technological development of alternative fuel vehicles, have led to oil demand in 2040 dropping slightly to 109.4 mb/d, a downward revision of 0.4 mb/d compared to last year. But with that lower outlook it is unlikely that OPEC will go on long term projects.

 

OPEC also swears that despite reports, they are on track to complete a deal to cut oil production. Despite reports by unnamed OPEC sources about rising tensions between Saudi Arabia and Iran, it seems the negotiations are going forward. Oil failure to close below support should signal a bottom unless the market gets a shock from election results.

We see oil supply bouncing back this week. Last week’s big build was an anomaly.  We see demand rising and we will see supply leveling off. OPEC is right that non-OPEC production is getting ready to fall and even with the additions of more rigs, US output will be stagnate. If Hillary wins we could see it fall hard.