Oil Market Oversupply Slowing Recovery

Published at 08:39AM - 20/09/16

Although the oil market may be showing signs of recovery, this is happening at a slow pace and it might still take until H1 2017 for oversupply to disappear.

Additionally, inventories should take between six and twelve months to be used, says a report by McKinsey Energy Insights (MEI).

“The market is recovering but this may be slower than previously expected,” the head of McKinsey Energy, James Heddy, says.

REPORT: Oil Market Oversupply Shows Slow Recovery

According to the report, the Organisation of Petroleum Exporting Countries (OPEC)’s capacity to increase production further could keep prices low for a longer period.

The MEI predicts that the recovery of oil prices will depend on four key drivers. These are GDP growth, the decline of producing fields, tight oil production in the US and the behaviour of OPEC members in the Gulf, namely Iran and Saudi Arabia.

REPORT: Oil Market Oversupply Shows Slow Recovery

As such, the MEI foresees four different possibilities: a fast recovery, a slow recovery, under-investment and supply abundance, with a slow recovery being the most likely event.

“We expect demand growth to decelerate as a result of slowing economic development and structural shifts in the transport sector,” Heddy explained.

Gulf Production to Further Stifle Prices

“On the supply side, in addition to OPEC Gulf crude production, we see unconventionals and offshore resources playing an important role in replacing the 34 million barrels per day (bpd) decline in conventional basins through 2030”, he added.

The research also notes that there is a key short-term risk that OPEC Gulf members have the capacity to add more than 3 to 4 million bpd incremental production by 2019, which could suppress prices further into 2018-2019.

The report’s latest findings follow the latest predictions by the International Energy Agency (IEA) saying that oil demand was slowing at a faster pace than initially foreseen.

The IEA expects a gain of 1.3 million bpd by the end of this year, less than 0.1 million bpd than its previous forecast.