Key points

• Since early November, oil prices have resumed a clear downward trend, punctuated by episodes of sharp declines during early to mid- December and the first half of January. A number of inter-related factors, including heightened volatility in financial markets and renewed concerns about China’s growth prospects, have lowered the oil demand outlook for China (the world’s largest crude importer and second largest consumer), despite recent data showing Chinese crude demand growing at a robust rate in 2015.

• Against a backdrop of weak fundamentals arising from both demand and supply-side factors, investor sentiment is playing an increasingly prominent role in determining short-term oil price movements. Speculative demand was a major driver in the latest leg of oil price declines in January, with market risk aversion indicated by the oil market VIX index skyrocketing in the month while net long positions of oil futures tanked. Over the period between November and January, Brent, Tapis and WTI generic 1st future price indices fell by 29%, 30% and 27% respectively to average at US$32, US$33 and US$32 a barrel correspondingly in January.

• With the gradual exhaustion of existing spare capacity and lack of infrastructure investment in the past year, a slowdown in US crude production is expected to accelerate over 2016, with the US Energy Information Administration (EIA) projecting production to average around 8.7mb/day this year. That said, the EIA’s forecast looks to be too weak given recent trends, we believe that the global oversupply might take longer to ease than the EIA’s central case outlook.

• In the near-term, there are further upside supply risks stemming from Russia and the OPEC region. With OPEC abandoning its output quota at its December meeting, Iraqi and Russian output continuing to rise, as well as an imminent increase in Iranian production in its post-sanction era, global supply is likely to increase further in the short-term. The lifting of US export crude ban by the Congress suggests further competition in the global markets from US exports, but poor margins currently are a constraint.

• A generally weaker outlook for demand and supply has led us to revise our oil price forecasts moderately lower throughout the entire profile. We now expect oil prices to recover mildly to USD 40/bbl by end-2016 and USD 50/bbl by end-17.

For further analysis download full report

• Oil Market Update – February 2016 (PDF, 567kb)