Oil might be called black gold, but right now the price of crude oil is less than half what it was just over a year ago. Moreover, according to a July 21st report from Morgan Stanley Research, things could get worse, possibly much worse, before they get better.
Morgan Stanley analyst Martiijn Rats and colleagues read the tea leaves and argue that despite increased demand due to the low price of oil, oil prices could well drop further due to constantly increasing oil production from OPEC members.
Global oil companies have made the right moves
Rats et al. highlight that global oil companies have, in the vast majority of cases, made the right moves by slashing both costs and capital expenditures. They point to guidance from 121 energy companies shows that upstream capex is off by 25% so far this year, and IHS’ Upstream Capital Cost Index was down an amazing 15% just in the first quarter.
Demand for crude is up significantly
Moreover, as basic economic theory would predict, much lower global oil prices has led to a notable increase in demand (consumption) of the commodity. As evidence of this trend, the MS analysts point out that he IEA has boosted its 2015 demand growth forecast from +0.9 million barrels a day in Feb to +1.4 mb/d as of June.
OPEC nations are pumping out oil like there’s no tomorrow
The only fly in the ointment for a recovery in crude oil prices is the constantly increasing amount being pumped out of the ground. Up until the last few quarters, it was the U.S. that was steadily boosting it’s crude production as the fracking revolution progressed. That has all changed now, as U.S. oil production has leveled off and OPEC producers are ramping up their production.
Rats and colleagues explain the situation: “US tight oil production growth has started to roll over, but this has been more than offset by OPEC, which has added ~1.5 mb/d since February. Our commodities team currently sees the oil market as oversupplied by ~0.8 mb/d. Hence, the entire current oversupply can be attributed to OPEC supply growth over the past four months alone.”
Could be worse than 1986 oil crash
The Morgan Stanley report concludes by pointing out that an additional +1.5 mb/d represents around one year of current demand growth. Continued production at this rate will delay the rebalancing of oil markets by at least a year as well. In fact, the forward curve for crude prices has started to reflect this reality, as the forward curve currently projects a much slower recovery of than in 1986.
