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Will Crude Oil’s Supply and Demand Narrow Down in 2016?

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EIA report

On August 11, 2015, the EIA (U.S. Energy Information Administration) released its monthly STEO (Short-Term Energy Outlook) report. According to the EIA’s data, the average supply and demand gap in 2015 is expected to average over 2.05 MMbpd (million barrels per day). In contrast, it’s expected to fall to 0.92 MMbpd in 2016. This signals slowing global production in 2016 and a marginal rise in consumption in 2016. The EIA estimates that US production could average around 9.36 MMbpd in 2015 and 8.96 MMbpd in 2016. It’s much less than the estimates for last month.

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EIA conservative

Morgan Stanley expects that the EIA’s estimates are common historical revisions. The reported figures seem to be conservative. The EIA also signals that OPEC’s (Organization of the Petroleum Exporting Countries) production could slow down in 2016. However, OPEC’s production hit 31.5 MMbpd of crude oil in July 2015—the highest since July 2012.

Saudi Arabia, Iran, and Iraq continued their mammoth production. The Iranian government could step up its oil production from 500,000 to 1 MMbpd of crude oil as soon as the oil sanctions are lifted. The Iranian government’s officials have identified more than 50 energy projects with an estimate of $185 billion. The better prospects of massive production from Iran in 2016 and the competitive production from non-OPEC members will continue to extend the crude oil market over a longer period.

The downward trend of crude oil prices will impact upstream players like EOG Resources (EOG), Anadarko Petroleum (APC), and Marathon Oil (MRO). Combined, they account for 7.21% of the Energy Select Sector SPDR ETF (XLE). These stocks’ crude oil production mix is more than 41% of their production portfolio.

Energy ETFs like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Select Sector SPDR Fund ETF (XLE) are also impacted by lower crude oil prices.

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