Our variant perception for why oil (NYSEARCA:USO) prices will move higher in both the near term and long term stems from the fact that our data shows the oil market's supply and demand is in deficit.
IEA published its monthly report today illustrating the crude stock decline we've been ranting about. The thing that usually gets most people when they look at the chart above is that the surplus in crude stock is only around 150 million bbls while petro product has surplus storage of about 150 million bbls. Looking at both Rystad's data and ours, we actually see crude inventory balancing to normal by the second half of 2017. Currently, the consensus believes that supply and demand will only balance by the second half of 2017, so our view is radically different than the consensus.
Even in the case that OPEC doesn't cut its current production, our estimate is that the current deficit is suffice for oil markets to draw down excess storage by Q4 2017. If indeed OPEC cuts production by 700k-800k b/d, our estimate is that storage will be normalized in about 170 days, or by June of 2017.
The timing of the rebalancing in this case isn't very important if you take a 2-3-year approach to this. As we detailed in our Big Picture Outlook piece on oil to premium subscribers, the supply falloff we will see by 2018-2020 will prove to be much more material than the consensus believes. In addition, if global demand remains healthy, the world will desperately need US shale producers to pick up the slack.
Overall, IEA confirms that crude storage is now in decline mode. Even in the case that OPEC doesn't cut production, we estimate crude stock to normalize by Q4 2017. The OPEC deal will only accelerate the rebalancing that's currently taking place.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.