''The thought occurs that we may not see a typical fall shoulder season and as such the market may be surprised by upcoming inventory draws.''
My August post looks prophetic given what has occurred in September!
Let's move on and take a look at 2017 as a supply deficit is looming that may also surprise the market. Thought I would illustrate a few points with the figure below:
Over supply may have started in 2014 with US shale growth, however the glut was OPEC doing from 2015-2016. (as we can see in fig.1 OPEC added 2.7 million bbls during this period) Sure US shale growth upset the OPEC apple cart in 2014, but thereafter after US prodn declined I suspect Saudi policy was more about the balance of power in the Middle East then it was about US shale. The Saudi obsession with Iran is well documented and after being blindsided by the removal of Iranians sanctions it is not surprising the Saudi pumped all out in order to get a production cap agreement with arch rival Iran. Think as long as Iran obliges and caps production at a reasonable level the Saudis will follow through and deliver the necessary cuts. In fig.3 the IEA's 2017 32.6 million OPEC prodn number is in line with the recent OPEC cut announcement, the IEA is no bull and has a notorious bias to the negative with oil.(and some would say to the sensational with headline grabbing fear mongering) Nevertheless it would seem apparent, with demand increases in 2017, OPEC cut and a lack of global investment in oil we are heading for an imminent supply deficit. September's surprising shoulder season withdraws from U.S inventory may be the tip of the iceberg as the stage is set for 2017 cleansing of excess inventory. Which brings me to my next graphic.
It has been clear for some time that the most important members of OPEC have been focused on gaining Asian market share. I doubt those hard gains for market share will be relinquished, however we may see a reversal in figure.2 back closer to figure.1 In other words instead of dumping an extra million barrels onto US shores from 2015 to 2016 we may see a substantial reduction in US OPEC imports. This should accelerate the long awaited US inventory re-balancing in 2017 and push oil much higher. Given demand the world will need US shale to grow again, albeit at a more modest pace. With the harvesting and depletion of sweet spots plus an inevitable rise in energy service costs back to sustainability $70 oil beckons.
What is for dinner? DUC you say?
Dont be fooled by corporate capital efficiencies that are interwoven with 1/4 cycle economics...If it walks like a DUC and quacks like a DUC, you can be reasonably sure it is a DUC. DUC's will deplete as producers harvest inventory to mitigate higher energy service costs that place upward pressure on capital efficiencies. Once we see this play out $70 oil could be breached.