Oil prices tumbled again in the last month, with front-month WTI futures down about 14% and Brent roughly 10% lower at the time of writing. That is a testament to the continued headwinds facing the oil industry, a recurrent theme of this Report. The rebalancing that began when oil markets set off on an initial 60% price drop a year ago has yet to run its course. Recent developments suggest that the process will extend well into 2016, as shown in our quarterly supply/demand balances for that year, unveiled here for the first time.
The rolling out of next year's oil market forecast, a rite of summer for this Report, is an opportunity to revisit the projections of the Medium-Term Oil Market Report released in February. To be sure, some of the intervening developments have come as a surprise: the financial market's exuberant response to the falling US rig count, the persistent vigour of North American supply, the odds-defying, record-breaking surge in Russian and Brazilian output, the paradoxical race of Riyadh and Baghdad to scale new production highs. The expected timing of the rebalancing has shifted a bit, but the story line has not changed. The supply response to lower prices is on the way, and US light tight oil (LTO) production is feeling the impact. While LTO output may be more price sensitive than conventional crude supply, it cannot stop on a dime: lags remain. Barring a major supply disruption elsewhere, it may also take another price drop for the full supply response to unfold.
Two nagging questions have recently emerged whose answers will shape the short-term outlook: why, in the face of a large second-quarter market imbalances and rapid stock builds, have oil prices not fallen faster? And could stock builds in 2Q15 really have been as large as implied by the 'total stocks change and miscellaneous to balance' line item of our 'Table 1', at a massive 3.3 mb/d? The key to the first enigma lies in the US gasoline market - the world's largest. Few consumers love a low oil price more than the American driver. Surging US gasoline demand since the oil price collapse has supported gasoline imports into the US East Coast and beefed up refiners' earnings worldwide, lifting global throughputs to records. This cannot last, given the challenge of finding a market outlet for the by-products of gasoline. Refining margins are already coming down from their highs.
As to the second riddle, the bottom line is that available data only go so far towards explaining a notional stock build of such magnitude. Preliminary reports show builds in the OECD - roughly half the global market - of 740 kb/d in 2Q15. China, India and Singapore together may have added another 350 kb/d. Refinery start-ups in Asia, the Middle East and Latin America could have absorbed large amounts of extra oil, as refiners typically store up to 35 days worth of crude runs and 15 days of product output. Oil on the water also surged, as crude cargoes from West Africa to the North Sea struggled to find buyers while Iranian floating storage and fuel oil on tankers in Asia have also built. All this might not amount to the full notional 2Q15 build. Nevertheless, even if the inevitable data revisions are taken into account, it remains that the oil market was massively oversupplied in 2Q15, and remains so today. It is equally clear that the market's ability to absorb that oversupply is unlikely to last. Onshore storage space is limited. So is the tanker fleet. New refineries do not get built every day. Something has to give.
That something is, first and foremost, LTO supply, thanks to its short lead times and steep decline rates. Cost savings, efficiency gains and producer hedging have let LTO producers defy expectations until now, but growth ground to a halt in May and will likely stay there through mid-2016 - down from annual gains of 1.0 mb/d in the first five months of 2015 and 1.8 mb/d in 2014. Total US supply will keep growing through 2016, but much more slowly than in 2014, and thanks to NGL and new deepwater plays rather than onshore crude supply.
Non-OPEC supply as a whole, after expanding by a massive 2.4 mb/d in 2014, looks on track to slow to 1 mb/d in 2015 and stay flat in 2016. Demand growth, meanwhile, is projected to reach 1.2 mb/d in 2016, slightly above the MTOMR's forecast. On the face of it, that makes for a tightening market next year, when the 'call on OPEC and stock changes' looks set to jump to 30.3 mb/d, up 1 mb/d on the year. That is still a whopping 1.4 mb/d below current OPEC production, however. And the group is not slowing down. On the contrary, its core Middle East producers are pumping at record rates and the outlook for Iraqi capacity growth - accounting for most projected OPEC expansions - keeps improving. Meanwhile, Tehran has made clear its intention to lift exports as soon as the ink dries on an accord with the P5+1, which at the time of writing was still under negotiation. The bottom of the market may still be ahead.