Oil in 2017: The end of the beginning? – HSBC

In view of the analysts at HSBC, looking at prospects for the oil market in 2017 and beyond, they think it’s getting increasingly harder to be too bearish.

Key Quotes

“We’re not getting carried away – our FY16 average price assumption is only USD4/b above current levels, but we see considerable further upside in the longer term. In our view, the issues with the main bear-case arguments on the outlook for crude are as follows: 

1. OPEC compliance not guaranteed: In our view OPEC’s agreement to cut supply will only accelerate a market rebalancing that was happening anyway. It’s right to be wary of likely compliance – it may not be 100% – but it doesn’t have to be. After the recent years of supply surplus we now see an average global deficit of 0.6mbd in 2017 (and probably closer to 1mbd in 1H) even at an aggregate OPEC compliance rate of just 60%. Also, OPEC spare capacity has now fallen to historically low levels, limiting potential supply growth and increasing the global system’s susceptibility to unexpected outage.

2. US tight oil will flood the market: Yes, US tight (“shale”) oil supply will bounce back – we expect a near-doubling of the oil rig count to drive tight oil supply back to a new peak by 2H18. However, we think many observers are underestimating the impact on the rest of non-OPEC supply from the combination of mature field declines and dramatically lower upstream investment. Even with strong growth in US tight oil, we see no growth in overall non-OPEC supply through 2020e.

3. Oil demand is under threat: We agree that there’s every likelihood that consensus estimates of long-term oil demand will come down – maybe materially – as policy initiatives and technological developments continue to gather pace. However, the impact of these changes in the near term is limited, and the demand outlook for the next several years looks very robust – particularly given an improving outlook for global GDP growth. Even on our below-consensus estimates, we see global demand growing by more than 3.5mbd between 2016 and 2020e.

Our price assumptions: still unchanged from a year ago. Last January we set out Brent price assumptions of USD45/b in 2016, USD60/b in 2017 and USD75/b in 2018. In the event, the 2016 average ended up at USD45.1/b. In past year we have seen a host of developments in the oil markets but on balance we haven’t seen any reason to change these assumptions. For 2017, we continue to assume a quarterly progression of USD55/60/60/65/b reflecting the market’s transition to balance during the year. Thereafter, our 2018e assumption reflects a steady further tightening of the market.”