Highlighting features of the report:

Oil price drop has led to a demand response of 1.7m b/d

The spectacular drop in oil prices in the past six quarters has been closely linked to fundamentals, in our view. Inventories have ballooned. And Saudi and Iraq have ramped up production in an oversupplied market that was already swimming in US shale oil. Even then, the price collapse has also lead to the second best year for demand in more than decade, with growth jumping to 1.7 million b/d in 2015. While duly exacerbated by a strong USD, we continue to believe falling oil prices are mostly a supply story driven by the advent of shale technology.

Yet prices have fallen too far. We see $55-75/bbl to 2020

Still, the current forward oil price structure has fallen too far to allow for a medium term balance in supply and demand, in our view. Real Brent crude oil prices are at one of the lowest levels in decades. The share of energy consumption as per cent of global GDP is now down to just 2.6 per cent, the lowest level since 1998. So cheap oil will likely encourage strong demand growth ahead. If oil averages $55 to $75/bbl, we estimate global oil demand will increase over 5 years by 5.9 million b/d (or 1.2 m b/d p.a.), as consumers no longer rush to buy smaller and more fuel efficient cars and consumption speeds up in Asia.

With oil at $30 to 2020 output shortfall grows to 4.8m b/d

Moreover, we now forecast close to zero non-OPEC supply to grow over the next 5 years as a result of the $230 bn, or 33 per cent drop in global oil and gas capex in the past 18 months. Note that our zero growth number embeds a recovery in US shale production of 0.9 million b/d, as we assume that oil prices will recover to encourage additional drilling activity in America. Should prices stay at $30/bbl, we would expect a supply decline across non-OPEC producers including shale of 4.8 million b/d by 2020. As such, we believe that the structure of crude oil prices has fallen too far and we see global crude oil prices averaging $55-75/bbl over the next 5 years.

Key risks include OPEC policy, technology, and demand

At any rate, our view carries significant risks. We continue to see three “known unknowns” that are hard to model and will impact the future price structure of oil. The first risk is OPEC. The Saudi forward production path remains unclear over the next five years. We also remain concerned about output sustainability amid weaker cartel members given the rapid credit profile deterioration. Second, it is hard to assess if oil demand will continue to respond so positively to falling oil prices and a strong USD. Third, technology changes could once again come into play to impact the global oil cost curve.