Market and product

Oil prices could "surprise to the upside" next year as the ability of US shale to become the new swing producer has been overplayed and the impact of record global stock levels may not be as bearish as many predict, according to Gunvor's head of market research and analysis, David Fyfe.

While OPEC's new free-wheeling output policy has hit high-cost oil production, such as US onshore shale plays, hard, consensus that US shale producers can replace OPEC as the main global swing oil supplier were "unrealistic", Fyfe wrote in the Financial Times newspaper Monday.

"Such a proposition overlooks the heterogeneous nature of shale and a likelihood the US will remain a sizeable net importer of crude for the foreseeable future," he said.

Although future US shale supply may moderate future oil price swings, supplies won't be sufficient to change the markets "inherently cyclical and volatile nature", Fyfe said.

The International Energy Agency estimates US shale production would need oil at more than $60/b to trigger an increase in production and sustain it in the medium term.

BULLISH HIGH STOCKS

Fyfe, the International Energy Agency's former head of oil market analysis, said that, with OPEC pumping flat out to maximize market share, the producer group's spare production capacity has fallen sharply, limiting its ability ramp up production further in response to higher demand.

With OPEC spare capacity "potentially only 1-2 million b/d" and given the limits of US shale to respond rapidly to high prices, refiners and governments "may prioritize higher levels of stockholding", Fyfe said.

In addition, although high stock levels in OECD economies are generally seen a bearish for oil prices, fast-growing emerging countries such as China and India need higher stock for new refinery projects and to fill growing tank farms, according to Fyfe.

"So, the simple fact of high stocks is not, by itself, necessarily bearish. It depends where, and for what reason, stock is accumulated... stock accumulation represents extra demand and can be price bullish," he said.

Looking ahead, Fyfe noted that modest inventory draws were already likely from late 2016 and sharply lower global spending on oilfield development as a result of the oil price downturn "see markets tighten again in the medium term."

Earlier this month, the IEA scaled back its market rebalancing expectations, saying it believed crude supply will continue to outpace demand at least through the first half of next year as global stocks continue to grow.

The IEA estimated OECD total inventories built by 32.5 million barrels in July to a fresh record of 3.111 billion barrels. - Platts