Oil and Gas: When Will Global Oil Markets Rebalance?

Based on Morningstar's 2016-17 forecasts of OPEC volumes remaining more or less flat, reaching a rebalancing point relies on demand growth and U.S. production

Stephen Simko, CFA 18 September, 2015 | 12:53PM

The most pressing question on the minds of energy investors is hardly a surprise: How long will it take for the industry to work through the current period of oversupply and rebalance itself? The answer, unfortunately, is; not any time soon. Current supply imbalances are such that as of today, oil production is effectively running two years ahead of demand. Declining U.S. oil production during the next several quarters will help reduce global oversupply, but in our opinion that alone cannot quickly fix the current global imbalances.

For the market to approach any semblance of normalcy before 2017 – and likely for prices to respond accordingly—requires one or more of the following to occur: 1) Saudi Arabia reverses course from its "maintain market share at all costs" approach and cuts production; 2) global demand surprises to the upside from current expectations of 95 million barrels per day in 2016 and 96 million barrels per day in 2017; and 3) a geopolitical event for example, political upheaval in Venezuela or another oil exporting nation. Without one or more of these occurring "lower for longer" looks to be the unavoidable near-term course for the industry.

Based on our 2016-17 forecasts of OPEC volumes remaining more or less flat, the two critical variables for determining when the industry will reach a rebalancing point become: 1) demand growth, and 2) U.S. production. We presently project demand to grow by more than 1% in 2015-17, as slowing but still growing demand from China is being offset by healthy growth elsewhere in the world.

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About Author

Stephen Simko, CFA  is a senior stock analyst at Morningstar.

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