The reason why oil has resumed its ascendant ways today is due to yet another focus, this time from the sellside, on the various disruptions in the oil market, following notes from Goldman, Bank of America, and Morgan Stanley according to which the millions in barrels of oil taken offline as a result of the Canada wildfire and persistent Nigerian supply problems will push the market into equilibrium much faster than originally expected.
To be sure, this is nothing new: the mainstream media has been pointing this out for weeks with Reuters highlighting the supply loss in a handy table just last Friday.
Reuters calculates offline oil supply at 3.75MM pic.twitter.com/w0bJOkArKR— zerohedge (@zerohedge) May 13, 2016
Still, now that the sellside is pushing for an even flatter oil strip - recall that Goldman's full note said that while the market may get into balance faster than expected, a surge in low-cost production by OPEC members will result in lower prices in 2017 - the market has no choice but to follow.
So for those who missed it, here is the visual representation of the current oil supply disruptions courtesy of Goldman.
Large supply disruptions have pushed production sharply lower since mid-March
Key planned and unplanned outages since mid-February (kb/d)
This is what Goldman said:
The recent roll-over in production is the result of somewhat offsetting cross currents. (1) Production has rolled over faster than we had expected in China, India and non-OPEC Africa more than offset upside surprises in the US and the North Sea. (2) Transient but recurring disruptions have more than offset larger than expected Iran and Iraq production. And while some of the disruptions will stop such as maintenance, fires and strikes, some are likely systemic, for example in Nigeria, and we now expect production there will remain curtailed for the remainder of the year. Net, this leaves us expecting a sharp decline in 2Q output.
So with the Canadian disruption now contained, the fate of the "oil disruption rally" is now in the hands of Nigerian militants who are responsible for "systemic disruptions" taking about half a million barrels per day offline.
Finally, it is worth reminding what Goldman also said in its note last night, because while the press has focused on the near-term upside catalysts it appears to have forgotten the other side of what Goldman noted, namely the return of chronis oversupply at a time of all time high crude oil inventories.
The inflection phase of the oil market continues to deliver its share of surprises, with low prices driving disruptions in Nigeria, higher output in Iran and better demand. With each of these shifts significant in magnitude, the oil market has gone from nearing storage saturation to being in deficit much earlier than we expected and we are pulling forward our price forecast, with 2Q/2H16 WTI now $45/bbl and $50/bbl.
However, we expect that the return of some of these outages as well as higher Iran and Iraq production will more than offset lingering issues in Nigeria and our higher demand forecast. As a result, we now forecast a more gradual decline in inventories in 2H than previously and a return into surplus in 1Q17, with low-cost production continuing to grow in the New Oil Order. This leads us to lower our 2017 forecast with prices in 1Q17 at $45/bbl and only reaching $60/bbl by 4Q17.
We expect continued growth in low-cost producer output
Saudi Arabia, Kuwait, UAE, Iraq, Iran (crude) and Russia (oil) production (kb/d)
For now, the market only cares about the impact on spot, and as of this moment, WTI is up over 3% back to levels last seen in November of 2015.