- Brent had rallied more than 20% by end-2016 after OPEC reassumed the role of supply manager, but has struggled to move past $56/bbl since January, falling to c. $52/bbl in March
- Increased US onshore drilling and record high level of US inventories have put a lid on price rally
- Cost reductions of 20-30% and higher oil prices have enabled US LTO producers to increase capex by 40% to keep production flat on average y-o-y, before growing faster in 2018
- However, global oil demand has been robust and growing at 1.6 million b/d – production cut compliance would thus need to improve to ease short-term oversupply with demand and supply closing to balance by mid-year
- OPEC’s planned projects will see its capacity increase by almost 0.8 million b/d in 2018 and a total of 2.1 million b/d by 2020
- OPEC is capable of increasing production by 1.47 million b/d once the production cut agreement expires in June, with US onshore production likely to increase by 0.5 million b/d to push supply growth above 2 million b/d in 2018
- Improved cash flow from higher oil prices in 2H 2016 has triggered increased offshore activity, but Big Oil remains cautious despite more projects becoming economic as a result of cost reductions – more upstream capex spending is needed to fill the supply gap
- Over longer-term, insufficient investment outside US shale basins could still lead to a supply gap as demand could grow 4.8 million b/d by 2020, although in principle Saudi Arabia is able to balance the market at the expenses of spare capacity
- In response to falling rig demand, contractors have drastically reduced their fleets through scrapping, cold-stacking and newbuild deferrals. This year should see both floater demand and rates bottoming out
- New discoveries and prospects in Guyana, Mediterranean, Mexico, Brazil and Africa offshore could potentially revive offshore activities from 2018
by Alexander Wilk // 10 March, 2017
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