The oil market is recovering but at a slow pace, and it could take six months for oversupply to disappear and another six to twelve months to burn excess inventories, McKinsey Energy Insight said in its recent report. McKinsey also feels OPEC’s capacity to increase production further could keep the prices lower for longer.

The data and analytics specialist suggests that the pace and timing of an oil price recovery depends on four key drivers in the short-term: GDP growth, decline in producing fields, slowdown in US light tight oil (LTO) production and OPEC Gulf state behaviour, in particular, Iran and Saudi Arabia.

McKinsey Energy Insights modelled four scenarios – fast recovery, slow recovery, under-investment and supply abundance – and the latest trends point towards a slow market recovery scenario. In this case, the market will take another six months for oversupply to disappear and another 6-12 months to burn excess inventories. In the long-term, continuous cost compression efforts could reduce average marginal costs to $65-75 per barrel, driven by deep-water and LTO plays.

James Eddy, Head of MEI says: “The market is recovering but this may be slower than previously expected. We expect demand growth to decelerate as a result of slowing economic development and structural shifts in the transport sector.”

What Eddy said is in line with last week’s oil market forecast by the International Energy Agency which said that oil demand was slowing at a faster pace than initially predicted. For 2016, a gain of 1.3 mb/d is expected – a downgrade of 0.1 mb/d on IEA’s previous forecast due to a more pronounced third quarter 2016 slowdown.

Eddy added: “On the supply side, in addition to OPEC Gulf crude production, we see unconventionals and offshore resources playing an important role in replacing the 34 million barrels per day (Mbd) decline in conventional basins through 2030.”

The research also notes that there is a key short-term risk that OPEC Gulf members have the capacity to add more than 3-4 Mbd incremental production by 2019. This could potentially stifle oil prices further into 2018-19, McKinsey Energy Insight said.

Source: www.offshoreenergytoday.com