Investment Research
15 September 2016
Commodities Strategy
Oil price recovery to withstand US oil output rise

US oil production is expected to bottom out at the end of 2016 and to gradually expand
during 2017 according to official supply forecasts.

The forecasted production expansion is supported by the recent increase in the number
of oilrigs.

US oil supply expansion is not expected to lead to lower oil prices, as a weaker USD
and robust global oil demand provide support in the future.
After the oil price collapse and the resulting investment cut, US crude oil production has been
steadily declining since mid-2015. However, domestic oil output is expected to bottom out at
the end of 2016 and to gradually expand during 2017 according to official supply forecasts by
the major energy agencies.
In its latest report, the IEA is predicting an increase in US oil production of 200,000bl/d from
19.3mbl/d in Q4 16 to 19.5mbl/d in Q4 17. Similarly, OPEC is forecasting a small rise in US oil
production of 100,000bl/d from 13.5mb/d in Q4 16 to 13.6mbl/d in Q4 17. The EIA is not yet
projecting a rise in US oil output next year but it stresses in its latest report that production is
expected to stabilise during 2017. The main drivers of the projected oil output expansion are
productivity improvements, lower breakeven costs and expected oil price increases. The
forecasted oil production increase is also supported by a recent uptick in the US oilrig count,
which is a good leading indicator. The number of oilrigs has increased by 31% from a low of
316 rigs in May to 414 in September 2016. However, this is still well below the highest count
of 1,601 rigs in September 2014. In our view, a US supply expansion should not lead to a slide
in the oil price. Firstly, the projected increase in US oil production in the medium term is likely
already factored into the forward curve, which still indicates towards a higher price. Secondly,
further improvement in the outlook for global economic growth as well as a continued slide in
the USD is set to benefit oil demand in the future and drive oil prices higher. We expect Brent
crude to average USD55/bl in 2017, rising from USD50/bl in Q4 16 to USD58/bl in Q4 17. This
implies that the price on jet fuel should average USD529/MT, ULSD USD489/MT, 0.1% gasoil
USD479/MT and 3.5% fuel oil USD271/MT in 2017, respectively.
US crude oil production has fallen
steadily since 2015
Source: Macrobond Financial, Danske Bank
Markets
US oil rig count increasing again
Source: Macrobond Financial, Danske Bank
Markets
US oil production projected to recover in 2017
million barrels per day
2016
OPEC1
1
2017
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
13.8
13.7
13.5
13.5
13.4
13.4
13.4
13.6
EIA2
9.2
8.9
8.5
8.6
8.6
8.6
8.4
8.5
IEA1,3
19.9
18.9
19.1
19.3
19.4
19.3
19.4
19.5
comprises crude oil, condensates, NGLs, oil from non-conventional sources and other sources of supply
2
comprises crude oil only
3
all OECD Americas
Source: OPEC, IEA, EIA, Danske Bank Markets
First Year Analyst
Aila Mihr
[email protected]
Senior Analyst
Jens Nærvig Pedersen
+45 4512 8061
[email protected]
Important disclosures and certifications are contained from page 2 of this report.
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Commodities Strategy
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This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The
author of the research report is Aila Mihr, First Year Analyst.
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