After a strong sell-off to start the week most financial assets and commodities are in a modest short-covering rally so far this morning. Although China’s equity market was hit with another strong round of selling other equity markets have recovered some of Monday’s losses with short covering spreading throughout the western trading session. The Chinese government lowered the bank reserve requirement by 0.5% overnight providing yet another level of stimulus for the faltering Chinese economy.
Yesterday was a risk-off day with selling across most all financial asset classes as well as most commodities. Even though oil has rebounded modestly so far today, the overall situation in oil remains bearish. The global crude oil market is going to need a much longer time for the market to rebalance as most of the rebalancing is going to have to come from the supply side of the equation. Demand will continue to grow but not likely at the pace that many estimated earlier in the year nor at a level to absorb all of the un-needed oil that is currently being produced.
Reuters is reporting the Iranian oil Minister indicated that Iran should be able to produce an additional 500,000 bpd as soon as sanctions are released with another 500,000 bpd coming shortly thereafter. With no end in sight in the short to medium term to the overproduction of oil the price will have to remain at low levels for a sustained period of time for the rebalancing of the global market to take hold.
The massive Capex cuts that have been announced since the beginning of the year are going to have an impact on future production in both non-OPEC and OPEC countries as new projects are postponed and/or just cancelled. Estimates suggest that there is over 4 million bpd of future production that is not likely to materialize in the forward period due to the current round of Capex budget and investment cuts.
Crude oil prices will find a bottom but based on the massive level of oversupply I do not see a v-shaped recovery rather I am expecting oil prices to remain depressed for an extended period of time followed by a slow steady recovery as global demand grows and supply cuts takes place. I am still expecting 2016 to be oversupplied throughout most of the year with the production cuts starting to impact the market in 2017 and beyond.