Energy: Supply glut continues, but some respite on pricing

The glut in crude supply will take several more quarters to work through.

Peggy Connerty 6 July, 2016 | 5:00PM
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The most pressing question on the minds of energy investors: How long will it take for the industry to work through the current period of oversupply and rebalance itself? The answer: Not anytime soon. Current supply imbalances are such that oil production as of today is effectively running two years ahead of demand.

Thanks to ongoing productivity improvements, cost reductions and slowing decline rates, U.S. shale's cost-competitive growth potential is much greater than the market currently realizes. U.S. tight oil has fundamentally altered the global supply picture, ensuring the industry has more low-cost resources to develop than it will need. Instead of a return to high long-term prices, the industry needs to find the oil price that can keep a lid on U.S. shale activity, which we think will be US$60 per barrel Brent.

Declining U.S. oil production over the next several quarters will help reduce global oversupply, but in our opinion, that alone cannot quickly fix the current global imbalances. For the market to approach any semblance of normalcy before 2017--and likely for prices to respond accordingly--requires one or more of the following:

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Peggy Connerty

Peggy Connerty  

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