FREEZE FOR BALANCE – OIL OUTLOOK
COMMODITIES REPORT
02 September 2016
We expect global liquids demand (excluding demand for strategic petroleum
reserves) in 2016 to grow by 1.28mn b/d yoy, compared to an expected
annual non-OPEC supply contraction of 0.83mn b/d in 2016. OPEC supply
growth (total capacity) in 2016 is expected to average 0.82mn b/d yoy.
In 2017, we see annual global demand growth to be 1.03mn b/d whilst nonOPEC supply will be flat, with a small gain of 0.06mn b/d yoy. OPEC growth
is expected to be up by 0.7mn b/d yoy.
A potential OPEC output freeze would bring parity in 2017 supply and
demand.
For SPR builds, we estimate India could import around 200,000b/d for the
rest of 2016 and China 80,000-160,000b/d in 2017.
There is also the potential for more of the disrupted production that we have
seen earlier this year coming back online such as in Nigeria and Libya which
will increase the surplus.
Speculative positions in oil (both retail and institutional) and moves in USD
will continue to play a strong role in driving oil prices in the next 12-18
months.
We maintain our price forecast from 1 August 2016 and maintain our view of
oil remaining under $50/bbl for rest of this year and become bullish towards
the end of 2017 in our central scenario in the absence of a freeze.
This report is a summary of the detailed Annual 2016 Oil Review which will
be published on Monday 12th September 2016 1PM British Summer Time.
Produced with the assistance of Edwin Poon, Energy Research Analyst.
Dr Abhishek Deshpande
Tel. +44 20 321 692 23
[email protected]
Michael Liu
Tel. +44 20 321 694 46
www.research.natixis.com
CORPORATE & INVESTMENT BANKING
INVESTMENT SOLUTIONS & INSURANCE
SPECIALIZED FINANCIAL SERVICES
Distribution of this report in the United States. See important disclosures at the end of this report..
COMMODITIES REPORT
Introduction
Oil markets have experienced a tumultuous last 24 months. Oil
price volatility has been exacerbated by the financial markets
and unprecedented outages in the first half of 2016. At a
fundamental level, markets had started to rebalance very
rapidly earlier this year on the back of stronger growth in global
demand and unprecedented supply outages, leading to even
small withdrawals. However since the start of third quarter, the
pace of physical market rebalancing has slowed due to
changes in the supply-demand dynamics. Additionally in the
last 12 months, oil prices have been driven significantly by nonfundamentals factors such as speculative positions and US
dollar moves. We believe physical balances in the near term will
remain sensitive to oil price recovery and vice versa. The time
required for full and sustainable rebalancing of the markets will
depend significantly on how various factors including OPEC
strategy, CAPEX cuts, demand for oil products and global
growth pan out in the near term. Without an OPEC freeze, the
rebalancing of the markets in the near term will depend on
supply outages not returning and growth in demand (for
consumption and strategic reserves) remaining strong.
Fundamentals
Global Demand
Global demand growth was at 940,000b/d yoy in 2016Q1. This
was led by India, which experienced 15% yoy growth in 2016Q1
as a result of strong diesel demand for industrial activities but
this was counterbalanced by contraction in Japanese demand
as the economy continued to slow down. Growth picked up
substantially in 2016Q2 by our estimates to 1.579mn b/d yoy,
primarily due to increased growth in US and European demand.
This was driven by consumers as both economies experienced
improving gasoline demand.
liquids production in the US and Russia. Supply fell sharply in
2016Q2 by 1.13mn b/d yoy led by unprecedented outages in
Canada due to the wildfires. This took 340,000b/d of production
offline in the second quarter compared to the same period in
the previous year. Whilst the impact was brief, the pronounced
decline has weighed on the annual average. Cyclical reductions
accelerated also as US production fell by 310,000b/d yoy from
independent producers, as a decrease in investments in 2015
became visible in the production.
For 2016 as a whole, cyclical shutdowns will drive most of the
supply decline of 830,000b/d yoy. China, along with the US, will
be the main contributors to this fall as its state-owned producers
scale back production in certain fields. We see declines in every
major region other than Russia and Brazil which are seeing new
projects coming online in the Arctic and pre-salt regions
respectively. The decline in non-OPEC oil production year-onyear should stabilise in 2017 and we expect to see a small
annual growth of roughly 60,000b/d. Whilst US supply will
continue to decline, it will be offset by increasing growth in
Brazilian production as more pre-salt production come online
and Canada as a result of a low base effect in 2016. However,
outages remain a downside risk as another equally strong
wildfire could affect Canadian production next year. Kashagan’s
starting production of 180,000b/d, which although has been
included in our analysis for 2017, still remains a risk to our nonOPEC supply growth projections given the delays it has
experienced in the past.
Oil & gas companies have cut back on capital expenditure by
around $380bn in 2015 & 2016 combined, with the US alone
accounting for around $150bn for the same period. We expect
another round of CAPEX cuts to be announced in 2017 at
current levels of oil prices. This is very much likely to impact
liquids production growth in 2018 onwards, if not earlier.
OPEC supply
For 2016 as a whole, we estimate an increase of 1.28mn b/d, or
1.35% yoy on average. This is on the back of overall strength in
US, Indian and European demand growth whilst Japan and
Brazil are expected to contribute in the opposite direction.
Chinese demand will be stable for the year, dragged down by
sustained diesel and fuel oil demand contraction along with
weaker yoy gasoline growth. In 2017, global oil demand is
expected to grow annually by 1.03mn b/d. Although the demand
growth is above 1mn b/d, it is less than 2016 growth primarily
due to relatively weaker growth in Europe, the US and India as
the effects of price elasticity fades. We also expect annual car
sales growth in OECD countries to slowdown. However we see
China rebounding to be one of the largest contributors to
growth, due to the huge car sales numbers seen this year
translating into gasoline demand growth and a smaller offsetting
effect from the industrial fuels.
Non-OPEC supply
OPEC crude supply increased by 1mn b/d yoy to average
32.72mn b/d (including Indonesia and Gabon) in 2016 YTD
(Jan-Jul). OPEC supply was up by 1.3mn b/d yoy in 2016Q1
and the growth in 2016Q2 had slowed down to 780,000b/d due
to lower production from Nigeria, Venezuela and Libya
respectively. Some of the decline from the three weak OPEC
members was offset by an increase in output by Iraq, Iran and
Saudi Arabia in both 2016Q1 and 2016Q2 on a year-on-year
basis. Saudi Arabia, Iraq and Iran’s production averaged
10.25mn b/d, 4.27mn b/d and 3.37mn b/d respectively in the
first 7 months of 2016.
For the 2016 as a whole, we expect OPEC supply growth to
average 820,000b/d yoy. We expect further 700,000b/d growth
in OPEC supply of crude in 2017 with oil field expansion by
Iran, Iraq and Saudi Arabia. In addition to the crude, OPEC
natural gas liquids are expected to grow at 160,000b/d in 2016
and another 130,000b/d in 2017.
Non-OPEC supply has remained unchanged year-on-year from
our calculations in 2016Q1. Cyclical declines such as those
seen in China as a result of low oil prices and drop in Brazilian
production due to disruptions were offset by increases in total
2
COMMODITIES REPORT
2016 physical balances (mn b/d)
97.5
97.5
+750,000b/d
97.0
97.0
96.5
96.5
96.0
96.0
95.5
95.5
95.0
95.0
96.86
96.56
96.11
94.5
94.0
94.5
94.0
94.83
Source: Natixis
93.5
93.5
93.0
93.0
2015 Supply
Increase
Decrease
Biofuel &
Processing
Gains
OPEC NGL OPEC Growth 2016 Supply 2015 Demand
Increase
Decrease
2016 Demand Stock Change
2017 physical balances without OPEC freeze (mn b/d)
98.5
98.5
+700,000b/d
98.0
98.0
97.5
97.5
97.0
97.0
96.5
96.5
96.0
95.5
96.0
97.84
97.14
96.86
96.11
95.0
95.5
95.0
Source: Natixis
94.5
94.5
94.0
94.0
2016 Supply
Increase
Decrease
Biofuel &
Processing
Gains
OPEC NGL OPEC Growth 2017 Supply 2016 Demand
Combining the supply and demand picture along with expected
OPEC growth, we see a 750,000b/d surplus in production in
2016 physical balances that will theoretically translate into stock
builds. This model on the one hand, excludes Chinese and
Indian demand for SPR builds but on the other hand does not
include certain potential resolution of outages, namely Nigeria
and Libya, which could bring further production online very
quickly. In 2017, with the same assumptions, we see a similar
stock build of 700,000b/d without an OPEC freeze. Taking into
account the SPR reserves, the commercial stock builds are
much lower for 2016, and for 2017 it will depend on how much
China and India add to their strategic reserves.
Increase
Decrease
2017 Demand Stock Change
(208,000b/d if it were all to be filled in the next 5 months) in the
rest of 2016 or early 2017 and China’s further additions are
dependent on the storage capacity additions coming online in
rest of 2016 and 2017, which remains a tightly guarded secret.
According to our analysis, around 63mn bbl of additional SPR
capacity was to be added in 2016 and another 31-63mn bbl
from 2017 onwards. This amounts to an additional demand of
80-160,000b/d in 2017. Hence, unless China expedites and
brings forward all its Phase 3 storage capacities in 2017 or
early 2018, we expect a potential slowdown in Chinese SPR
builds in the next 18 months. This could significantly push the
balancing of the markets further down the road and maintain
pressure on oil prices.
SPR crude demand
Outages
Crude demand for filling up SPR by China and India has, in our
view, helped significantly to provide some support to oil price as
we believe that in the absence of this crude demand, oil prices
are likely to have remained under significant pressure. Although
very sporadic, the frequency of increased Chinese oil imports
unaccounted for by its apparent consumption in the last 18
months remained fairly high. China imported close to 0.8mn b/d
of excess crude in 2016H1, thereby filling, in our view, most of
the SPR capacity added in 2015 and 2016 under Phase 2. India
is expected to have filled 7.3mn bbl as of mid-2016 so far
(40,000b/d). India is expected to add another 31.8mn bbl
There were significantly higher planned, unplanned and cyclical
outages in 2016 which helped tighten the oil markets during the
second quarter. This switched the fundamentals from surplus to
parity, if not even small withdrawals, in 2016Q2. Unplanned
outages in Libya, Nigeria and Canada alone took away close to
1mn b/d in crude output in April-May 2016. The sensitivity of
crude output to oil price from the other regions, including China
and the US, could further exacerbate the decline in oil
production. Additionally, deteriorating fiscal conditions in oil
revenue-dependent countries such as Venezuela have led to
3
COMMODITIES REPORT
reduced investments as oil prices have remained low for a
significantly longer period of time. Venezuela is on the brink of
sovereign bankruptcy and its oil production has started to
decline since late 2015, but the month-on-month decline picked
up pace in 2016Q2. Halliburton and Schlumberger announced
earlier this year that they will cut back on activity in Venezuela
due to lack of payments. Lower oil prices also pose political
risks and the danger of increased strike actions in some of the
oil states as they scale back on some state benefits under more
austere budgets. Kuwait is an example where public sector
strikes in 2016Q2 led to a sharp drop in their oil output for three
days.
The total volume of outages for various oil producing countries,
considered in our analysis from their point of highest production
in the last 12 months, adds up to over 3.2mn b/d in May 2016.
The unplanned and cyclical outages are therefore a significant
swing factor to oil markets balancing earlier or later than when
the markets currently anticipate. They pose a big risk to
reducing oil prices if most of these outages were to be resolved
at the same time as they went offline. Equally, they could
provide further short term support to oil prices if more oil supply
from these countries or additional oil producers were to
experience oil output disruptions.
significantly less, based on JODI data as IEA does not publish
non-OECD data.
Total OECD Stocks Vs Crude, NGLS and Products
(billion bbls)
3.25
1.7
Total Stocks
Crude & NGLs (RHS)
3.10
1.6
Total Products (RHS)
2.95
1.5
2.80
1.4
2.65
1.3
2.50
Source: IEA
2.35
Jan-09
1.2
Jan-11
Jan-13
Jan-15
Global Oil and Oil Products Inventories
(billion bbl)
4
Crude Oil (LHS)
6
Total Oil Products (LHS)
Total (RHS)
3.5
3.0
2.5
2.0
1.5
1.0
Russia
US
Colombia
Algeria
UAE
Venezuela
Nigeria
Brent ($/bbl, rhs)
Brazil
China
Canada
Iraq
Kuwait
Libya
Saudi Arabia
5
55
45
Sources: OPEC, NEB, EIA, Petrobras, ANH,
Bloomberg, Natixis
This is not an exhaustive list.
Mar-16
Apr-16
4.5
May-16
2.5
2
Jan-10
Source: JODI, Natixis
Note: Excludes Russia
Excludes SPR for China and US
3.5
3
Jan-12
Jan-14
Jan-16
40
35
Feb-16
3
4
50
0.5
0.0
Jan-16
5.5
3.5
Notable recent cyclical, planned and unplanned
outages from oil producers (mn b/d, lhs)
Jun-16
30
Jul-16
Inventories
According to JODI, oil and oil products stocks globally
(excluding Russia and SPR) rose by around 900mn bbl
between Jan 2010 and June 2016. Approximately 60% of the
increase was seen in oil products, whilst the rest came from the
rise in crude oil stocks. Additionally most of the oil products
stock builds (around 74%) were observed in non-OECD
countries whereas 55% of the total crude stocks build were
observed in OECD countries. According to IEA, OECD oil and
oil products stock builds were around 364mn bbl for the same
period. However, IEA data shows there was a small decline in
total oil stocks in OECD between January 2010 and Jan 2014
due to stronger demand-led drawdowns. Since January 2014,
total OECD oil and oil products builds have been over 542mn
bbl. For the same period between January 2014 and June
2016, increases in non-OECD stocks seem to have been
Is there a case for OPEC Non-OPEC oil output freeze?
We definitely think so. There are a lot of risks to oil
fundamentals, especially from an unexpected return of Nigerian
or Libyan crude, or potentially lower-than-expected imports from
China as it imports less crude for SPR filling. As a result, we
could see oil markets taking longer than anticipated to balance
by the leading agencies. We think a more combined effort to
freeze oil output at current level for next year will help provide
the stability and support required to prices by the key oil
producers in the world. Equally, no freeze could lead to further
pressure on prices which would lead to increased shutdown
and possibly more bankruptcies in oil industry worldwide and
not just in the US. The onus is now on OPEC to balance the
markets as we believe that they are the key contributor to the
existing surplus in 2016. A lot more members seem keen
towards addressing the oversupply by freezing the output.
However, we still believe for output freeze talks to be
successful, OPEC members need to be producing oil at their
optimal levels. Iran now has increased its production by
800,000b/d since the lifting of sanctions and we don’t expect
any further additions to Iranian production at least until later in
2017 due to the requirement of new investments. Hence,
Russia proposal of excluding Iran could work.
4
COMMODITIES REPORT
2017 physical balances with OPEC freeze (mn b/d)
98.0
98.0
97.5
97.5
Negligible
97.0
97.0
96.5
96.5
96.0
96.0
95.5
97.14
97.14
96.86
95.5
96.11
95.0
95.0
Source: Natixis
94.5
94.5
94.0
94.0
2016 Supply
Increase
Decrease
Biofuel &
Processing
Gains
OPEC NGL OPEC Growth 2017 Supply 2016 Demand
Financial Markets
Financial markets have played a pivotal role in driving oil prices
in 2016. Total net longs in Brent and WTI have undergone three
major moves in 2016 so far. Between 29 Dec 2015 to 26 April
2016, Brent and WTI net longs for futures and options (CFTC
data) increased by 255.7mn bbl and 148.3mn bbl respectively,
which is equivalent to 2.15mn b/d and 1.25mn b/d of paper
demand. This bullish trend was on the back of further CAPEX
cuts being announced by US oil companies and unprecedented
outages vindicating investor positions. From 31 May 2016 to 26
July 2016, investors reduced the net longs by 95.4mn bbl for
Brent, equivalent to 1.56mn b/d and reduced by 120.1mn bbl for
WTI, equal to 1.97mn b/d. This was caused by a high sell-off
mainly due to the EU referendum result. In the last few weeks
from 2 Aug 2016 to 23 Aug 2016, we noticed a rally once again
in total net longs as OPEC producers announced a potential
production freeze and post-Brexit result economic data for UK
and Europe was positive. Brent and WTI net longs increased by
126.1mn bbl and 157.3mn bbl respectively, equivalent to 5.5mn
b/d and 6.8mn b/d.
Prompt Brent has moved significantly due to the large scale
increase in net longs or selloff in Brent and WTI positions in
2016 as investors are finding the opportune time to get in.
However oil price and physical balance recovery have been
United States Oil Fund ETF: monthly
fund flows ($mn)
2000
2000
1500
1500
1000
1000
500
500
0
Aug-07
-500
0
Mar-09
May-12 Dec-13
Jul-15
-500
-1500
-1000
-1500
Source: Natixis, Bloomberg
The US Oil Fund’s ETF positions have seen extreme monthly
inflow and outflow by measure of volume. The year-to-date fund
flows rounded off to an outflow of $250mn compared to the total
inflow of $2bn in the first 8 months of 2015. 2016 started off
WTI: Total net-long managed money
(Futures & Options)
Manag ed Mon ey (WTI net-long )
Lon g
Lon g
Manag ed Mon ey (Br ent ne t-lo ng)
500000
400000
400000
300000
300000
200000
200000
100000
Sources: Natixis, CFTC
Feb-15
Oct-10
-1000
Sho rts
0
Aug-14
2017 Demand Stock Change
US Oil Exchange-Traded Fund
BRENT: Total net-long managed Money
(Futures & Options)
100000
Decrease
circuitous in nature, with one affecting the other in a very short
time frame. This is especially due to short term investment
cycles in the US, oil price-influenced outages or recovery and
also price elasticity of demand.
Hot Money Inflows
500000
Increase
Aug-15
Feb-16
0
Aug-16
Sho rts
400000
400000
300000
300000
200000
200000
100000
100000
Sources: Natixis, CFTC
0
Nov-14
0
Mar-15
Jul-15
Nov-15
Mar-16
Jul-16
5
COMMODITIES REPORT
with a total inflow of $1.3bn in Jan-Feb, followed by total
outflows of $1.46bn in Mar-May. In August, total outflows were
around $234.6mn as investors turned bearish once again on
excess oil inventories.
30-day Historical Volatility (%)
2016 YTD
Dollar Correlation
2015
Oil dollar correlation has been one (not the only) of the key
short term factors in causing significant swings in oil prices in
the last 12-18 months. The one-month oil-dollar rolling
correlation with daily returns has ranged from +52% to -72% in
a span of just one year on several occasions. One of the
strongest moves in oil was seen just post-EU referendum when
oil-dollar correlation reached -72% for Brent and -73% for WTI
in the first week of July 2016. Since then, the correlations have
reversed and increased to +23% in early August 2016 and once
again have returned to no correlation towards the end of August
2016. Anticipation of rate hikes just before Fed meetings is
another factor that has led to increased short term correlation
between dollar and oil in the past. We expect the US dollar to
continue to impact oil and commodities prices in the near term,
especially around Fed meetings deciding on rate changes. The
swings could be more significant if the Fed increases rates
faster than markets are anticipating. At Natixis, we forecast
DXY index to rise to 98.86 in 3 months and 100.36 in 6 months.
Fed Chair Janet Yellen’s comments at last month’s meeting in
Jackson Hole, Wyoming, raised market estimates of a rate hike.
This has supported the dollar and put some pressure on oil, in
addition to the fundamentals not tightening as fast as markets
initially expected.
1 month rolling correlation with daily returns
0.6
0.4
DXY WTI 1 month
DXY Brent 1 Month
0.2
0
Jan-14
-0.2
Jun-14
Nov-14
Apr-15
Sep-15
Feb-16
Jul-16
-0.4
-0.6
Sources: Bloomberg
-0.8
-1
Volatility
Volatility in oil markets reached a new high in the last 18
months. 30 day historical volatility for WTI reached 62% in
February 2016 and that for Brent was close to 64%. Historical
volatility in general in 2016 was twice as high as the average
between 2011 and 2014. We expect volatility in oil prices to
remain high as risks to oil prices from unplanned outages,
slowdown in demand from China for SPR, dollar led moves or
geopolitical factors are likely to affect oil prices even more as
markets try to price in tightness in the physical balances in
2017. 30-day implied volatilities were slightly higher at 45% for
WTI and 45.6% for Brent in 2016 YTD.
2011-2014
Brent
WTI
41.6
40.6
28.76
30.3
13.6
14.1
Source: Natixis, Bloomberg
Historical Volatility (%)
BRENT 30 Day historical volatility
WTI 30 Day Historical volatility
60
60
40
40
20
20
Sources: Natixis, Bloomberg
0
Jan-11
Jan-12
Jan-13
0
Jan-14
Jan-15
Jan-16
Oil Price Forecasts
Considering that near-term market dynamics are a reflection of
what we see in the market today, we maintain our oil prices
forecasts last revised on 1 August 2016. We have consistently
remained bearish for this year and maintained a very bullish
view towards the end of 2017. Under our central scenario, we
expect further CAPEX cuts in 2017, which is likely to lead to
further demand-supply imbalances towards the end of 2017 or
2018.
In the absence of an OPEC freeze, we do not see sustainable
and meaningful drawdowns in 2017, and hence in our central
scenario, we see oil prices remaining below $50/bbl for rest of
2016. In 2016H1 oil price recovery will remain slow. However,
after further CAPEX cuts are announced in 2017, we should
see the impact of lower oil prices on non-OPEC cyclical
supplies towards the end of the year. Our central scenario
suggests oil price recovering towards $58/bbl. Investors are
likely to increase their long positions rapidly by 2017Q2.
In the event of an OPEC freeze at current levels, we could see
a sharp rebound in oil prices to $56/bbl in 2016Q4 rising to
$68/bbl in 2017Q4.
6
COMMODITIES REPORT
The factors that would justify our low case scenario are: return
of Nigerian and/or Libyan oil, market share strategy intensifying
between OPEC players, slowdown in demand growth, and rapid
increase in Fed rates next year. Oil prices will remain under
$50/bbl even towards the end of 2017. Front month Brent
spreads have fluctuated significantly so far in 2016 and we can
expect the spreads to widen further in the coming month in our
central scenario before narrowing and the curve flipping into
backwardation only towards the latter half of 2017. However in
our high case scenario, which is based on an OPEC freeze, we
can expect the curve to shift into backwardation by early next
year if not earlier.
Natixis Near Term Forecast
Forecasts ($/bbl)
Low Case Scenario WTI
Brent
Base Case Scenario WTI
Brent
High Case Scenario WTI
Brent
Note: As of 1 August 2016
30-Sep-16
38
40
43
45
50
52
31-Dec-16
40
42
46
48
55
56
Natixis Medium Term Forecast
Forecasts ($/bbl)
2016
2017
2018
2019
2020
WTI (Base Case)
41.975
52.75
68
78
83
Brent (Base Case)
43.725
Note: As of 1 August 2016
54.75
70
80
85
31-Mar-17
42
44
49
51
61
62
103
70
108.1
109.2
97.7
Market
80
94.85
103.7 Natixis 85
101.5
70
60
84
88
88
86
90
90
92
92
91
70
50
50
Source: Natixis
40
Aug-16
Feb-17
40
Source: Natixis
40
Aug-16
Feb-17
Aug-18
70
Natixis
60
50
Feb-18
2017
44.3
46.3
52.8
54.8
63.5
64.5
60
50
Aug-17
2016
39.2
41.0
42.0
43.7
46.0
47.5
Market
60
84
30-Sep-17 31-Dec-17
45
46
47
48
54
56
56
58
64
67
65
68
WTI price outlook - futures vs Natixis forecast
($/bbl)
Brent price outlook - futures vs Natixis forecast
($/bbl)
98.7
30-Jun-17
44
46
52
54
62
63
40
Aug-17
Feb-18
Aug-18
7
COMMODITIES REPORT
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