I don’t think I need to rehash my thesis on crude markets here as it’s well known to anyone who frequents these pages (for anyone new to the Heisenberg Report, see here for some random, stream of consciousness ramblings on oil).
Suffice to say I’m in the camp who believes we’ll never get any real balance until capital markets slam shut on US operators who rely on debt, revolvers, and follow-ons to plug their persistent funding gaps. In other words, the OPEC cuts will only matter if gullible investors (and Wall Street greed) stop creating zombie producers.
Well, speaking of zombie production, here’s a great chart just out from Goldman that I imagine you’ll be seeing elsewhere over the next couple of days. I’ve also included a bit of color from the bank’s latest.
Stronger oil demand to end 2016 helps to accommodate slightly higher US oil supply, but we see downside risk to our WTI forecast of $55/bbl in 2018 if our upside case for US supply growth plays out all else equal. Stronger global oil demand in 4Q16 led to a sharper than expected reduction in OECD inventories which helps contribute to a lower bar for inventories on a days of demand basis. Essentially the stronger demand and slight tweaks elsewhere (OPEC compliance, timing of Kashagan ramp up) helps to at least temporarily accommodate greater US oil supply ramp (increasing the 2017 call on US oil). We continue to see oil inventories moving to normal — by the end of 2017 — though we see a slight increase in inventory days vs. the 5-year average in 2018. This assumes our base case scenario of 0.9 million bpd of US oil growth in 2018. If our upside case of 1.1 million bpd plays out, all else equal there could be downside risk to our $55/bbl WTI oil price.