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Medium Term Crude Oil Outlook

|Includes: BNO, The United States Oil ETF, LP (USO)

Oil is in an all familiar spot once again, with Opec cutting trying to prop up prices and US unconventional oil trying to stage a comeback, the quiet monster over the next few years is clearly awakening: Real Supply/Demand Deficit. Although todays EIA data, is most notably bearish, it is subject to revision over the next few weeks as monthly figures come about.

Coming back to the forecast deficit, let's start with Demand; Oil Demand is usually quite stable growing 1-2% annually, yet Oil Supply is the more vulnerable input given geopolitical events, natural well declines, and new discoveries.

Given that 2/3 of global supply comes from OPEC, Russia and North America, and this 2/3 is the major source of future supply growth, and the other 1/3 is facing a natural decline curve of 2-5%, then we end with a Supply/Demand outlook over the next 36months that looks something like the following:

The Table above represents the expected changes in Supply/Demand from 2017-2019. I took these figures from EIA.IEA, and OPEC forecasts, and made them more conservative (i.e. cut demand, increased supply forecasts), and still we end up with a deficit all the way to 2019.

Regardless of if Opec cheats, or raises production beyond the peak of 2016, or Russia pumps out as much as it can, or even US shale surprises to the upside, if Demand forecasts are correct - and historical error in demand forecasts is quite low barring a recession - then we are in a tightening Oil market which will bode well for the entire sector. From majors, to independent E&P, to offshore, and oil services co.'s.

Taking a more granular look at the EIA, and IEA forecasts for 2017 in detail in the table below:

Both these forecasts have similar outlooks, and forecast a balanced market in 2017… The biggest assumption in these forecasts is that Oil demand growth remains stable over a normal 3year forecast barring a recession.

Thus, either the equity, and bond markets are correct in anticipating growth over the next 3years, and Oil is about to embark on a new demand led bull market, or the next decline in Oil prices comes from slowing demand and not increasing supply… For now, the medium-term outlook for Oil looks constructive and should be bought on dips; Wholesale! (i.e. Crude Oil ETFs & Futures, Shale stocks, Drillers, Offshore etc.…)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.