The oil market is closing in on stabilizing.
Crude oil has rallied in early February as some traders have speculated that the supply glut — which has been blamed for the oil crash — may be under control.
In a video Monday, Morgan Stanley’s Martijn Rats said that even though crude oil supply may remain unchanged while demand drops in Q2, “we are seeing tentative signs that oil markets are starting to rebalance later this year.”
“Make no mistake: There is still overproduction,” he added. “But the amount of estimated overproduction is getting less, and that is a positive development.”
These are his three reasons why:
- Energy companies were quick to cut capital expenditure plans in reaction to the oil crash. Collectively, oil companies have skimmed $US88 billion off their capex plans. That dollar amount is enough to build up 500,000 barrels of oil per day, and this is how much less oil would be produced if companies don’t revise their capex cuts in 2016. The entire industry has slashed capex by 22% — close to the 24% reduction in 1986.
- Drilling activity is following capex cuts lower. Oil rig counts in the US have been tumbling, down 30% from their high. Rig counts are down about 10% outside the US.
- Non-OPEC supply growth forecasts have also been falling. The three main forecasting agencies — 12-member cartel OPEC, the International Energy Agency, and the US Energy Information Administration — are all forecasting lower non-OPEC growth.
Morgan Stanley also upgraded stocks in both the Oil Services and Exploration and Production sectors to “attractive,” in “one of the most uncomfortable calls” Rats’ equity research team has made.
On Tuesday, West Texas Intermediate crude oil fell up to 1.95% to $US51.75 a barrel.
Brent crude was little changed at $US61.16 a barrel, after reaching a year-to-date high of $US62.57 on Monday.