UBS House View Daily

Thought of the day

21.08 - Crude arithmetic

Weekly estimates from the Energy Information Administration show US crude production continues to increase, with preliminary estimates indicating it broke through 9.5 million barrels per day (mbpd) in mid-August, a level last seen in July 2015.

Despite rising US supply, US crude inventories have declined for seven consecutive weeks, and crude prices jumped 3% on 18 August alone. We believe supply-demand dynamics point to further gains ahead:

  • Brent crude oil prices are trading in backwardation, with prices for delivery two and three months into the future lower than spot prices. The shift to backwardation in Brent indicates physical market shortage. The previously reported supply glut in the Atlantic basin appears to have disappeared, with reports indicating that Asian countries have soaked up the surplus.
  • More broadly, the global economic recovery has boosted oil consumption. Second-quarter demand figures were above trend at 1.85 mbpd, with demand in May rising by 3mbpd. For the full year demand should expand at a solid pace of 1.4mbpd.
  • Supply growth has been modest this year, up by 0.5mbpd y/y in 1H17, while demand expanded by 1.5mbpd in the same time frame. As a result, global inventories continued to contract.

So with global demand expected to continue to outpace supply, inventories look set to fall further. We expect the rebalancing dynamics to gather pace in the third quarter, with inventories expected to decline by more than 0.5mpbd in 2H17. In our view, this will help push crude prices to USD 55–60/bbl before year end.

Chart of the day

OECD inventories rebalancing as demand rises

(in millions of barrels)

Crude arithmetic

Source: IEA, UBS; Date: August 2017

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