FxWirePro: WTI prices most likely to regain momentum by 2017, EM, non-OPEC to stimulate D/E equation – Right time for aggressive investors

Currently, although crude and product inventories glut keeps persisting, non-OPEC supply, led by declining US crude output, is falling. Based on this, as well as solid global demand, we anticipate slight global stock draws in H2 2016, and significantly bigger global stock draws in H2 17.

The long-awaited rebalancing of the global crude oil markets has begun. The first transition is from oversupply (stock-builds) to balanced, which is where we are now. The second transition will be from balanced to deficit (stock draws), and this will happen in H2 17.

We foresee the global demand growth at a healthy 1.3 Mb/d in 2016 and 1.4 Mb/d in 2017, driven by emerging markets. Driven by falling shale oil output, the US continues to lead the way for non-OPEC supply as a whole.

US output of crude (only) is projected to contract by 0.7 Mb/d in 2016, in our view, but to decline by a more moderate 0.4 Mb/d in 2017. We expect shale supply to bottom out in Q3 17. We see the global implied stock-build for crude and refined products falling from 1.7 Mb/d in 2015 to only 0.3 Mb/d in 2016. We project a global stock draw of -0.5 Mb/d for 2017.

Looking in more detail, global inventories should draw by a slight -0.2 Mb/d in H2 2016, be balanced in H1 2017, and draw by a larger -1.0 Mb/d in H2 2017, driven by seasonally stronger global demand. We are cautious on the near-term price outlook due to downward pressure from seasonal (autumn) weakness in crude and product demand. However, we become more bullish as we progress through next year when we forecast steadily increasing prices driven by global rebalancing.

For long term aggressive investors, we recommend buying Dec-17 WTI on dips towards $50/b and expect WTI to trade close to $60/b by late 2017.