* OPEC and storage concerns weighing on oil prices
The decline in oil prices has resumed, driven by the aftermath of the OPEC
meeting, renewed weakness in distillates and exacerbated by positioning.
Although prices are now below our 3-mo $38/bbl WTI forecast, we still see
high risks that prices may decline further, as storage continues to fill.
* Tank tops not our base case, but too close for comfort
Our oil price forecast remains anchored by the view that high producer
financial stress and shut funding markets near $40/bbl can halt the oil
surplus by 4Q16, mainly through declining US production. Our base case
remains that the global oil stock build will on aggregate remain shy of
storage capacity, although the storage buffer has once again narrowed, to
340 kb/d on average for 2016. But this rebalancing is far from achieved: (1)
the US rig count and E&P guidance remain too high to achieve the required
supply decline, (2) we see risks to our OPEC production forecast of 32 mb/d
next year as skewed to the upside (Iran), (3) storage continues to fill with
the odds of hitting storage constraints by the spring rising. As a result, we
reiterate our concern that “financial stress“ may prove too little too late to
prevent the market from having to clear through “operational stress” with
prices near cash costs to force production cuts, likely around $20/bbl.
* European distillates can still push prices lower
For now, storage pressures are localized: European distillate prices are
showing symptoms of stocks nearing capacity with gasoil timespreads,
cracks and cash basis falling sharply. Warm EU and US weather, strong
China diesel exports on weak demand and resilient refining margins on
strong gasoline cracks lead us to expect that EU distillate markets will
reach 99% of storage capacity in January. This represents an even
narrower storage buffer than we previously expected with normal weather
distribution leaving a 40% probability that storage runs out. While
localized, this lack of EU gasoil storage capacity could nonetheless quickly
spillover into further crude oil price declines: a modestly larger distillate
surplus than we forecast would need to push refinery margins lower with
run cuts spilling over into crude inventory builds and weaker crude
timespreads by at least $2/bbl as floating storage would likely become
necessary.