Oil: Spring forward, stocks fall back - HSBC

In view of the analysts at HSBC, we are on the cusp of sizeable falls in global oil stocks with US tight oil looks set to grow fast, but the market will need it to avoid a supply crunch in the next few years and they see price risks firmly to the upside: their FY Brent average assumptions remain USD60/b for 2017e, USD75/b for 2018e.

Key Quotes

“Spring is in the air, and so too is the prospect of a sharp decline in the global inventory excess in the next few months. Recent sentiment on oil prices has been caught between the positive impact of OPEC supply cuts, and negative risks from sharply higher US tight oil (“shale oil”) activity. What really matters though is whether we see hard evidence that the oil market is tightening, and we expect to soon.”

“Stocks should start falling: OECD stocks declined slightly last year – hardly a sign of a badly oversupplied market. US stocks peaked in mid-February, and we expect more decisive inventory falls in the coming weeks as OPEC supply cuts are more fully reflected in data. The end of the US refinery maintenance season means we’ll see it in crude stocks soon, not just in products. We think this could prompt a further rally in prices from current levels.”

“We haven’t changed our price assumptions in nearly 15 months. We assume a USD60/b Brent price average for 2017e, broken down quarterly to USD55/60/60/65/b (1Q came in at USD54.6/b), and a 2018e average of USD75/b. USD60/b looks achievable to us in the near term if there are the falls in global stocks that we expect.” 

“We update our comprehensive supply/demand model, and there are two main, offsetting changes: 1) we raise our forecasts for US tight oil supply materially to reflect recent evidence – we now see it up 1mbd this year (y/e vs y/e), and more than 3mbd by end-2020e; 2) we also raise our demand estimates by ~1mbd to reflect increasing evidence of stronger historic base levels.”

“We see global stocks falling by 0.6mbd this year, but the fall could be more than 1mbd if OPEC extends its cuts through 2H, which we think is starting to look likely. This would be enough to erase most of the global surplus by year-end. Supply and demand look broadly in balance in 2018-19 assuming OPEC cuts are unwound and tight oil continues its strong growth. That doesn’t mean a soft market: inventories will be far lower, global spare capacity will be at historically low levels and signs of an impending supply squeeze will probably be gathering. In fact, we expect decline rates and a lack of new project sanctions to have an increasingly obvious negative effect on non-OPEC supply as we approach the end of this decade. Even though short-cycle tight oil will offset some of this shortfall, long cycle times for the majority of global production make an adequate response in time increasingly difficult to see.”