Oil price recovery will be slow, analyst predicts

McKinsey Energy Insights (MEI) predicts it will take more than six months for oil markets to fully rebalance.

The pace and timing of an oil price recovery depends on four main issues in the short term, the analyst claims: GDP growth, decline in producing fields, a slowdown in US light tight oil (LTO) production, and OPEC Gulf state behaviour, in particular, Iran and Saudi Arabia.

MEI modelled four scenarios – fast recovery, slow recovery, under-investment, and supply abundance – and the latest trends point to a slow recovery scenario, with another six months for oversupply to disappear and another six-12 months to burn excess inventories.

Over the longer term, ongoing cost suppression measures could lower average marginal costs to $65-75/bbl, the analyst adds, driven by deepwater and LTO plays.

James Eddy, head of MEI, said: “The market is recovering but this may be slower than previously expected. We expect demand growth to decelerate as a result of slowing economic development and structural shifts in the transport sector.

“On the supply side, in addition to OPEC Gulf crude production, we see unconventional and offshore resources playing an important role in replacing the 34 MMb/d decline in conventional basins through 2030.”

There is also a short-term risk that OPEC Gulf members could add more than 3-4 MMb/d incremental production by 2019, potentially holding back oil prices into 2018-19.
MEI conducted its research using its Global Liquids Supply Model software.