Will Oil Ever Recover?

In a new report, Macquarie Research analyst Vikas Dwivedi discusses the firm’s outlook for crude oil. Overall, Macquarie sees value in the oil market, but investors will need to be extremely patient while the industry rights the ship.

State of affairs
As nuanced as some of the statistics and models for crude oil are, the primary reason oil prices have collapsed is simple supply and demand. The process of eliminating the massive 2 million bpd global crude oil oversupply has already begun, but Macquarie believes that it will not be completely eliminated until 2017.


However, the re-balancing will be aided by what the U.S. Energy Information Administration (EIA) is projecting to be the highest global demand growth for oil since 2010.

OPEC not helping
While U.S. produces have been scaling back rig counts in a major way in response to the supply glut, core OPEC members have simply chosen to ignore the problem so far. U.S. producers have reduced their oil rig count by 916 rigs since October of 2014, but core OPEC members have actually increased their oil rig count by 8 rigs during that time.

OPEC is taking advantage of the fact that much of its oil can be produced at a lower cost than U.S. producers can achieve, and so far OPEC is willing to tolerate the pain of low prices in the name of maintaining/regaining market share.


What’s next?
Despite the fact that WTI reached new 6-year lows in the past week and the U.S. Oil Fund ETF USO hit new all-time lows, Macquarie doesn’t see any relief on the way for oil bulls in the near future. However, despite a relatively bearish view on oil prices versus consensus for 2015 and 2016, the firm’s $80-$85/bbl forecast for Brent in 2017 is above consensus, providing some hope for farsighted oil bulls.