Near-term fundamentals are deteriorating
Latest datapoints suggest a deceleration in oil demand, driven by now tough year-on-year comps and weakening macro in emerging markets. With inventories of both crude and products continuing to rise, storage options are becoming limited, particularly in the European diesel market. Breaching diesel storage would force refineries to lower runs/shut down, temporarily reducing crude oil demand, and potentially forcing crude to be stored offshore, requiring a further steepening in the forward curve. Whilst not there yet, we are approaching levels that are likely to force production temporarily offline, in our view, bringing us closer to a bottom in oil prices.
Although a bottom is in sight, rebalancing may not be immediate
Unless production is forced offline for operational (running out of storage) or financial reasons (cash costs), risks to supply remain skewed towards continued resiliency. Our Top 420 analysis suggests a strong year of largely derisked production growth from the industry’s giant fields, shale continues to become more productive, OPEC supply should continue to rise and, whilst we expect declines to accelerate in mature regions, FX and lower costs continue to support production. We remain constructive on demand, seeing 1.3mbpd of growth in 2016, although we see downside risk from milder weather in the OECD and weaker trends from commodity producing regions such as Africa & the Middle East.
Whilst continued deflation poses downside risk to the cost curve
FX devaluation and positive surprises in productivity gains and service cost deflation are not only keeping production more robust than expected, but also flattening and lowering our Top Projects cost curve, suggesting
downside risk to our $65/bl brent forecasts in 2017/18 and potentially putting a cap on any oil price recovery.
Near-term oil, gas & EU refining all challenging: Sell Statoil & OMV
Although the back end of the curve will likely have to rise, generally a positive signal for oily equities, near-term risks remain skewed to the downside. European integrateds, already pricing in $55-60/bl brent and in the near term exposed to low oil prices, low LNG/European gas prices and weak European refining margins, appear particularly negatively impacted. We highlight Statoil (Conviction List) and OMV as key Sell ideas.