Lightstream Resources Ltd. LSTMF

Tudor Pickering Holt - market close to being balanced

[JohnDD]

Tudor Pickering Holt - market close to being balanced

From TPH on January 13:

The market fundamentals are improving, and barring major demand weakness or unanticipated OPEC supply, oil prices should materially increase in 2H16. We are updating our global crude oil supply and demand model to reflect our refreshed US production outlook which shows slightly larger declines in 2016 and continued declines in 2017 as an activity rebound will lag our assumed 2H16 oil price recovery. It is important to point out that demand growth of +1.8mmbpd in 2015 was higher than most believed possible, US production has been in decline since mid-2015, and project cancellations are creating significant uncertainty surrounding non-OPEC (ex/US) growth in 2017+. The most recent OECD inventories, although at record high levels, are building at ~normal rates…implying a market close to being balanced.

> Price tweaks: We have adjusted our oil price outlook to reflect the lower current price with $36/bbl in 1Q16 increasing to $50/bbl in 2Q16…but we still expect $80/bbl in 2H16. Our longer dated oil price remains $90/bbl.

> We anticipate tightening global supply and demand fundamentals starting in 2Q16 and continuing tightness into 2017 as ongoing demand growth and non-OPEC supply declines put pressure on OPEC to increase supply in 2017.

> Demand: We maintain our 1mmbpd annual demand growth in ’16 and ’17 which is consistent with the long term average annual growth rate but slower than 2015’s 1.8mmbpd. Current global demand uncertainty is weighing on the oil price and if fears of flat y/y demand become a reality, the oil price recovery is likely pushed into 2017 and oil prices could stay below $40/bbl as storage capacity risk increases. [My take is that IEA is too low on their demand forecast. Low fuel prices does increase demand. - Dan]

> OPEC: we anticipate 500kbpd of post-sanctions Iranian production in 2Q16 which will be partially offset by our assumption of 200kbpd of current cross-border “leakage” into Iraq. Structural declines in 2nd tier OPEC should continue in 2016 (200kbopd). Thus, Iranian increases are largely offset by 2nd tier declines and leakage into Iraq…resulting in only a small increase from the current OPEC production rate of 31.7mmbpd. By 2H17, further market tightness requires an additional OPEC production increase of 1.2mmbpd, led by Saudi. We assume Iran, Iraq, and Libya also contribute to the 2017 production increase.

> Risks: Uncertainty around demand and OPEC create a dark cloud over the oil markets. Although 2015 demand growth of +1.8mmbpd was much higher than believed possible early in the year and our 2016 forecast is a much less aggressive 1mmbpd, demand concerns remain a major oil market headwind. If demand were flat y/y (which would be the third worst demand year in the last 3 decades), it would push any oil market recovery into 2017 and further inventory builds would put downward pressure on oil prices. Another risk is OPEC supply. Although we model a lower net increase from post-sanctions Iran than most, if 2016 sees incremental supply from Libya (if peace ever breaks out) or Saudi (“take that Iran!”) the recovery could be pushed into late 2016.