Recovery delayed despite Brexit impact fail

MASSIVE inventories, spluttering demand and surging OPEC production is leading an increasing number of analysts to believe the oil market won't rebalance until at least late 2018, despite the pervading optimism that appears to have rendered the impact of the British decision to exit the Europe Union economic alliance largely impotent.
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While the Brexit referendum caused shudders in global financial markets, oil market volatility that reached its recent low in January has been relatively contained by comparison, as the UK and the EU more broadly play a limited role in generating oil demand growth.

However, it Europe is a growing source of gas demand, with the second US LNG cargo heading to Spain last month from the Sabine Pass liquefaction facility in Texas, leading some analysts to believe North America could undermine Russia's gas monopoly in Europe.

Europe accounts for around 15% of the world's crude oil demand, but its relative share is also expected to decrease over time as the demand in other regions such as the US, China and India is expected to grow much more quickly.

The UK accounts for less than 2% of world's oil demand, and its demand for refined crude products is undergoing a structural decline.

The International Energy Agency said in its Oil Market Report for July yesterday that "robust" European demand supported June quarter global demand growth at around 1.4MMbopd year-on-year, momentum that will be roughly matched through the year as a whole.

The IEA foresees a "modest" deceleration next year as growth eases to 1.3MMbopd.

Despite the persisting glut, the positivity is becoming infectious, with Barclays upgrading its sector outlook to "positive" saying energy could be one of Standard & Poor's best performing sectors over the next 12-18 months.

"We think the global oil market is currently in the midst of a continued upward trajectory in which Brent could average $85 by Q4 2017 and $80-$90 between 2018 and 2021," Barclays analyst Paul Cheng said.

"We estimate our group of major oil companies is trading at a 19% discount to their net asset value, based on a Brent oil price of $80 per barrel."

NAB said last week it expected the global oil market to return to balance by the first half of 2018, and revised its forecasts higher in light of recent events.

Saudi Arabia's energy minister Khalid al-Falih told a German newspaper this week that there were still excess stocks on the market - "hundreds of millions of barrels" of surplus oil - an inventory overhang which would take "a long time" to reduce.

So much oil is now being stored that the world is running out of room for it, forcing traders to charter supertankers in which to keep unsold fuel, leading analysts beyond NAB to believe it could in fact be well into 2018 before market balance is reached.

The IEA said OECD commercial inventories built by 13.5MMbopd in May to end the month at a record 3074MMbbl.

"Preliminary information for June suggests that OECD stocks added a further 900,000bbl while floating storage has continued to build, reaching its highest level since 2009," the IEA said.

While growth stutters in Asia, demand is surging again with Saudi Arabia ramping up to a near-record rate of 10.45MMbopd last month, while Nigerian oil flow has been partially recovered, bringing OPEC crude output up to an eight-year high of 33.21MMbopd, including newly-joined Gabon.

In fact, the IEA said the Middle East more broadly sustained record pumping rates, consolidating market share and pushing OPEC's total output 510,000bpd above a year ago.

Yet NAB sees a cautious lift in prices over the next 18 months, expecting them to fluctuate between $US45-50 a barrel in the next quarter 2016, before reaching low $50s by the end of this year and around $60/bbl by end-2017.

Even that, however, is not certain.

NAB warned that OPEC members' repeated failures to reach an agreement to freeze output at around their current levels leave room for potential expansion in the cartel's production should competition in EU and Asia Pacific regions intensify.

"Furthermore, a recovery of Canadian, Libyan and Nigerian production from supply disruptions are also expected to add to upward supply-side pressure, which suggest upward movements in prices could be relatively constrained in the near-term," NAB said.

The Singapore Exchange said this week that the question of Iran's return and how much more it would produce was likely to be key supply factor in the short-term.

A majority of respondents in an SGX survey believe Iran will add between 500,000 and one million barrels per day in new capacity by the end of 2017.

Iranian output in June climbed to 3.63MMbopd, its highest level since June 2011.

Hurricane

While analysts were still poring over what impact Brexit would have on the UK's economy, particularly with Scotland a major if declining producer and Ireland looming as an exploration hot spot offshore with Woodside Petroleum, among others, involved, North Sea oiler Hurricane kept the momentum going by appointing Petrofac as operator in a three-year contract for wells West of Shetland in its Lancaster field.

Petrofac is the first outsourced well operator to manage a drilling campaign in the UK Continental Shelf under the Offshore Safety Directive Regulator's new regulations.

Though drilling started on Hurricane's block on July 6, Edison warned that while a resource base that only justifies an early production system development was still likely to be "economically viable", it could prove harder to finance in the current market.

The key objective of Hurricane's latest drilling is to locate the Lancaster oil-water contact to provide better definition of the Lancaster resource range, driving EPS and full-field development design.

Submission of the field development plan and final investment decision on the EPS phase of the development is expected in the first half of 2017.

Edison believes 36 million barrels could be conservatively recovered at Lancaster's structural closure through a two-well development, which is currently Hurricane's low case.

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