Even with a global glut in oil supplies set to last well into 2017, indications are emerging that a recovery in prices could get underway sooner rather than later.
Oil prices have fallen by two-thirds since mid-2014 to trade near 11-year lows below $40 a barrel and most analysts don’t expect them to regain the $100 mark until 2017 or later, arguing that producers will continue to pump out more crude than is demanded.
A growing number of traders are, nonetheless, positioning themselves for notably higher prices a year from now through the purchase of bullish call options.
Open interest in Brent crude call options tied to strike prices from $50 to $80 per barrel has climbed steeply in recent weeks, indicating growing confidence that prices will stage a strong recovery from current levels.
Factors supporting a more positive outlook range from higher car sales to heightened security and political risks in some oil producers and debt-laden shale firms on their last legs.
Indeed, some banks are now holding a more bullish view on the crude market.
“Although there are some downside risks for oil prices in the near-term, we believe that oil prices will recover in the course of 2016,” ABN Amro said.
Morgan Stanley said that “continued demand growth and less supply mean that the oversupply in oil markets could disappear by year-end” of 2016.
FUELING UP: STRONG CAR SALES FROM EAST TO WEST
The glut is a result of oversupply, yet global gasoline demand has been strong, thanks to rising car sales.
China’s November car sales jumped 20 percent from a year earlier, putting the world’s biggest automobile market on track for annual sales growth of 5-7 per cent.
Almost 25 million new cars will have hit China’s roads in 2015, and by 2020 most analysts expect annual sales of 50 million.
Even European car sales are growing, with Western European markets up 5-10 percent, according to monthly industry data.
US car sales are on track for a 2015 increase of 3 per cent and are expected by the National Automobile Dealers Association to hit a record next year before dipping slightly in 2017.
India’s oil demand, approaching 4 million barrels per day (bpd), is also soaring as its economy grows at more than 7 per cent a year and hundreds of thousands buy their first car.
The resulting gasoline demand is expected to spur refiners to produce as much fuel as they can and should bolster 2016 crude demand as long as refining margins remain profitable.
On the supply side, the Organization of the Petroleum Exporting Countries (OPEC) is expected to maintain near record-high output next year, especially if Iran’s sanctions-hit sales fully resume. Outside OPEC, Russian production is also showing no signs of slowing.
But US production – which rose from under 6 million bpd in 2010 to more than 9 million bpd this year, driven by output from shale – has started to fall as operators wrestle with mounting debt.
The slump has created dozens of “zombies” among shale-drillers, a term used to describe companies that have just enough money to pay interest on debt but not to drill sufficient new wells to replace older ones that are drying out.
Global oil producers have little spare capacity to raise output to meet demand in the event of a large-scale supply disruption.
While most producers are running flat out, only Saudi Arabia has significant spare production and even it could only plug a gap of 2 per cent of global demand at predicted 2016 rates.
Risk consultancy Control Risks said in its RiskMap 2016 outlook that “the security and political risk outlook is worse than at any point in the past decade”, citing a mix of terrorism threats, political instability and economic uncertainty.
At the same time, China is expected to build its strategic petroleum reserves further, adding to oil demand that is already more than 10 million bpd.
Because of all this, the International Energy Agency (IEA) expects global oil demand to rise from an average of 94.6 million bpd this year to a record 95.8 million barrels in 2016.
With oversupply estimated between 0.5-2 million bpd, it would only take OPEC pulling back from its current output of more than 31.5 million bpd to its long-standing quota of 30 million bpd to re-balance the market.
“The oil market remains more tightly balanced than is reflected in today’s low prices. The oversupply is about 1.5 percent of a 95 million bpd market with limited spare capacity in a risky political setting for weak petro states prone to disruption,” Citibank said.