Via Citi:
Citi continues to believe that the market is mispricing the potential impact of a 6-month roll-over to the current OPEC deal, and it is this that should provide the impetus for higher prices and a firming curve structure. In 2Q’17, our global stocks monitor indicates that crude and clean refined product stocks are down ~25- m bbls QTD (-0.6-m b/d), with a 17-m bbl draw in on-land stocks and an 8-m bbl draw in off-shore inventory. With stock-draws expected to continue in June, this gives us significant optimism about market tightening given oil stocks (these also include NGLs) have averaged a 0.64-m b/d build in 2Q over the last 6 years, and even during 2011-14 averaged a 0.51-m b/d build. This is being backed up by physical markets perking up with USGC, North Sea and Urals grades all trading well.
Citi currently expects a global oil (crude, petroleum product & NGLs) stockdraw of close to 1-m b/d in 2H’17 which should be the main proponent of higher oil prices and investor inflows. Historical relationships point to timespreads getting ahead of spot oil prices in terms of the recent strengthening, but more recent trading relationships as well as the likely return of US producer hedging with cal-18 WTI now trading close to $52/bbl indicate a further rally in crude structure. The 1st/6th month timespread vs. Brent flat price relationship during 2015- 17 points to Brent moving into backwardation when the spot price is $60/bbl (Citi’s price target for 3Q’16) and this is something we expect to occur. Cal-18 NYMEX WTI traded above $57/bbl after the last OPEC meeting, yet it is expected to run into stronger resistance now in the $55-60-/bbl band as it is trading closer to the prompt and producers are now well hedged for 2017 implying activity is likely to be targeted for 2018. If crude curves continue to steepen and move into backwardation closer to the prompt, then this will further accelerate inventory draws in the summer.
