Why No Doha-Deal is Likely Positive for WTI Longer Term

With OPEC and non-OPEC members unable to reach a deal over the weekend to freeze oil production, a few positive conclusions can be drawn. Most notably, the lack of a Doha deal will allow the rebalancing process of supply and demand to continue to its natural conclusion. Specifically, market fundamentals would suggest that the global oil market is already heading to a natural equilibrium. On the demand side, recent data from China suggests that a dramatic build-up in the countries strategic petroleum reserve and surging demand for imported crude oil are likely to transform the global energy markets in 2016 (regardless of any production freeze agreed to by OPEC). It is estimated that China will import an average of 8 million b/d of oil this year, a significant jump from 6.7 million b/d last year. This is arguably enough to soak up a large portion of the excess supply currently flooding global markets. Also, combined with increasing demand from China is fast rising oil demand in India. On the supply side, it has been recently estimated that roughly $400 billion in oil and gas projects have been shelved since the onset of the commodity slump (a significant number of depleting fields will not be replaced). Accordingly, a reduction in non-OPEC supply is likely to be in the range of 0.7-1.0 million b/d in 2016. Ultimately, a deal in Doha would have delayed the global oil price recovery with a self-defeating rally. Oil prices would have likely rallied to above $45 a barrel, incentivizing producers to quickly ramp back up production. Allowing for a natural rebalancing of the global oil markets is the best case scenario for oil prices longer term.