Spring is in the air and so too is the prospect of a sharp decline in the global oil inventory excess according to HSBC’s Natural Resources & Energy research team. In a research note published at the beginning this month, the team headed by Gordon Gray Global Head of Oil & Gas Equity Research proclaims that they expect decisive oil inventory falls in the coming weeks as OPEC supply cuts are more fully reflected in data … and that is bearish for Global Oil Stocks.
Overall, the team sees global oil stocks falling by 0.6 million barrels this year, but the fall could be more than 1 million barrels if OPEC extends its cuts through the second half. This would be enough to erase most of the global surplus by year-end. Supply and demand look broadly in balance in 2018-19 assuming OPEC cuts are unwound, and tight oil continues its strong growth. US stocks of crude and products peaked in mid-February and are down less than 2% from their highs.
Global Oil Stocks: Drawdown expected
HSBC’s main argument for a drawdown in inventories this year is based on a continuation of the current trend that has been in place since mid last year. OECD commercial inventories of crude and products peaked in July 2016 and declined for five consecutive months, ending the year 115mb below the peak and below end-2015 levels. This “represents the longest stretch of consecutive monthly draws since 2011, and it strongly suggests that the market was already close to balance in 2016, contrary to what most observers thought at the time.”
Oil bears will claim that a rebound in commercial inventories in January, which erased around 40% of the cumulative draw in stocks since July 2016, marks an end to drawdowns. However, HSBC’s team notes that this spike was “largely caused by higher imports from cargoes in transit through Q4 2016.” It is interesting to note that the IEA’s preliminary data shows a small 5.3mb inventory draw in OECD inventories in February, despite further build in US crude stocks.
Not only are fundamentals looking more supportive on the supply-side, but also on the demand side oil fundamentals are improving. For example, the IEA’s estimate of 2016 global demand has risen by nearly 1mbd since the start of 2016 itself.
There’s also an increasing likelihood that OPEC will extend its production cuts into the second half of the year. HSBC believes that so far comments from OPEC members appear to be supportive of the cuts being rolled over thanks to a high level of cooperation from non-OPEC participants, a visible level of progress on inventory reduction and the crude price response.