Oil Market Monthly:Supply outages outpace producers'disarray

We raise our 2016price forecasts by $3.50/bbl to $41/bbl for Brent and $40/bblfor WTI. 2017forecasts are raised to $52/bbl for both WTI and Brent, anincrease of $4.25/bbl from our previous forecasts. We retain the view that pricesshould soften in the short term. However, the bigger picture is still that thesupply adjustment continues to build momentum and that should tightenbalances during 2H16.

    While we remain cautious on the speed of the recovery in Iran, Saudi Arabia’slast minute insistence on all OPEC members’ participation in the agreement tocap production at January levels in our mind reveals a dysfunctional approachto the producer negotiations that may have damaged other nations’ willingnessto participate in further initiatives.

    1H16balances have tightened since the March assessment, in part as Chinesestrategic stockpiling averaged 0.8mbd in the first quarter, well ahead of ourassumptions. More recently, the elevated level of supply outages in Nigeria andKuwait have added to the evidence of conventional oil production declining aslow prices bite into company cashflow and capex levels.

    We retain our yoy demand growth expectations for 2016and 2017of around960kbd and 1.1mbd, respectively. While we still await final data for 1Q16,demand growth has been slightly more positive than we had expected. However,a higher price deck – our models incorporate rolling weighted average pricechanges – results in lower demand growth in 2H16offsetting the positiverevisions in 1H16demand estimates. Specifically, we have lifted our assessmentof 1Q16‘other demand’ as the gap between trade and refinery input dataindicate a higher than expected stock build in China.

    Non-OPEC production is expected to decline by 0.9mbd in 2016with the yoydecline rate expected to peak at 1.2mbd in 4Q16, before easing in 2017and infact increasing over year ago levels in 4Q17, as higher prices incentivizeproduction. OPEC supply estimates – excluding the inclusion of Indonesia – arelittle changed this month. Despite improving prospects for Libyan productionfollowing the creation of a Unity Government, we retain our forecast of 0.4mbd, pending hard evidence that gains in stability and security are durable andsufficient to allow for the restart of key fields.

    Trade Recommendation Update: We continue to recommend being long ICEBrent July 16$35/bbl put. We remain long the NYMEX RBOB Jul’16versusSep’16spread. We also remain long the ICE Brent Dec’16$60/bbl versus$70/bbl call spread.