Peter Dupont, analyst at Edison Investment Research, said: ‘In the wake of the 2015 double dip we expect a market transformation led by sharp cutbacks in capex and recovering demand, leading to prices firming up in 2016 and 2017.’
“The oversupply of the crude market has weighed prices down to six year lows in 2015. However, in the wake of the 2015 double dip we expect a market transformation led by sharp cutbacks in capex and recovering demand, leading to prices firming up in 2016 and 2017.
“The oversupply situation is nowhere near as loose as it was a year ago. Excess production is projected to have narrowed from 2.4mb/d in H115 to 1.7 mb/d for the full year. During Q4 we forecast average prices similar to Q3, kept low by fundamentals, at $50.5-barrel for Brent crude.
“By 2016, we expect an approximately balanced market. The principal driver behind this is the decisive downward trend in US production, which will gather pace in coming months and contribute to declines in non-OPEC output in 2016-2017.
“Dragging non-OPEC output lower will be the sharp cutback in capital spending. Already well underway, this may exceed 40% in the US onshore sector in 2015 and reach 25-30% internationally. A further double digit decline is likely in 2016 in our view, putting a floor under crude prices.
“Benchmark light crude prices will continue to trend higher in 2017. In the absence of any major technical or political disruption to output, we would however expect any upturn in prices to be restrained.
“The constraints are the flexibility of US shale producers and the likely desire of Saudi Arabia to avoid a major price surge leading to a loss of market share to renewables and natural gas.
“Our 2017 price forecasts for Brent crude is $70-barrel. Over the balance of the decade this double constraint should hold firm and limit upwards price momentum.’