Macroscope | Supply overhang and poor demand prognosis suggest oil has further to fall

Brent and NYMEX light sweet crude remained range-bound in the US$40s through September, but no one in the market was subscribing to it as the bottom, amid a persistent supply overhang and worsening prognosis for demand growth brought on by a string of gloomy economic headlines, especially in the emerging markets.

Several banks and financial institutions once again lowered their price forecasts for 2015 and 2016, with Goldman Sachs planting US$20 a barrel in the market’s consciousness as a possible new nadir. Nine of the top forecasters monitored by Platts settled in a range of US$54 to US$58 a barrel average for Brent this year, and US$49.5 to US$62 a barrel next year.

China’s economic slowdown and manufacturing contraction has become old news across the commodity markets. The new narrative to grab attention was an accelerated drop in US crude production and four straight weeks of decline in its onshore oil rigs count, reversing increases in the previous two months.

The US Energy Information Administration revised down its US crude production forecast to 9.22 million barrels per day (bpd) for 2015 and 8.82 million bpd for 2016, with some analysts saying at the current rate of output decline, next year could see a far steeper drop, of 850,000 bpd. The latest weekly data showed production had slipped nearly 500,000 bpd from June’s peak of 9.6 million bpd.

A flat West Texas Intermediate (WTI) forward price curve even two years out forebodes more cuts in US upstream capital spending, as hedges begin to roll off. Meanwhile, the second round of semi-annual bank loan re-determinations for the smaller US independents showed most managing to maintain their borrowing base, contrary to fears of massive deleveraging.

Nevertheless, analysts warned many of the hardest hit smaller operators are inching towards restructurings or even bankruptcies, which would continue slowing down the drilling of new wells, shrinking production the rest of this year and into 2016.

The International Energy Agency suggested non-Opec supply was poised for the biggest drop in more than two decades of nearly 500,000 bpd next year, and pushed up its “call” on Opec oil in the second half of next year to an average 32 million bpd, a level the group last pumped in the throes of the 2008 oil price super-spike.