The world’s second-largest sovereign fund sees the global oversupply of oil persisting until at least next summer, as markets take time utilizing excess crude already in storage.

“The markets should work with the inventory overhang and then re-balance only once that overhang is gone,” Christof Ruehl, global head of research at Abu Dhabi Investment Authority (ADIA) told Bloomberg last week. “When the winter season comes, we will have a clearer idea at which level this re-balancing occurs,” he said, adding that the process will take until at least next summer to play out.[1]

The oil market has received support from unlikely sources in the second quarter, as supply disruptions at major producers helped to rebalance an oversupplied market. Millions of barrels of crude oil have gone offline in Canada, Venezuela, Nigeria and Libya due to a variety of environmental and political constraints. These supply disruptions, coupled with hope the Organization of the Petroleum Exporting Countries (OPEC) would curb output, supported a massive rally in the price of oil through June. At one point, US crude futures were up more than 90% from the February doldrums near $26 a barrel.[2]

Britain’s unexpected exit from the European Union (EU) on June 23 caused a rupture in the latest rally, pushing oil prices back down by nearly 7% over a two-day period.

US crude production is expected to decline by 665,000 barrels per day in 2016 and a further 420,000 barrels in 2017 if we factor in the current rig count figures, US multinational investment bank Goldman Sachs said in a June 6 note. This will likely help crude prices recover back toward at least the $60 a barrel mark through next year.

Oil production among OPEC members declined in May from a near record due to supply disruptions in Nigeria and Libya. The cartel pumped 32.52 million barrels per day in May, down from 32.64 million in April, according to a survey conducted by Reuters.[3]

“What it takes to get to $60 is very simple: some more supply disruptions,” Mr. Ruehl told Bloomberg. “What it takes to stay down is some of that oil coming back.”

According to Mr. Ruehl, US shale producers are unlikely to ramp up production unless they have reasonable expectations that prices wouldn’t drop back to the $20-$30 a barrel range after increasing production.[4]

The number of active rigs drilling for oil in the United States has declined almost every week this year, a sign that producers were remaining offline until prices rebalanced.[5]

[1] Manus Cranny, Mahmoud Habboush and Anthony Diapola (June 22, 2016). “World’s 2nd-Biggest Sovereign Fund Sees Oil Glut Until Mid-2017.” Bloomberg.

[2] Myra Saefong and Mark DeCambre (June 7, 2016). “Oil tops $50 for best finish in more than 10 months.” Market Watch.

[3] Alex Lawler (May 31, 2016). “OPEC oil output falls from near-record in May on outages.” Reuters.

[4] Manus Cranny, Mahmoud Habboush and Anthony Diapola (June 22, 2016). “World’s 2nd-Biggest Sovereign Fund Sees Oil Glut Until Mid-2017.” Bloomberg.

[5] Zacks Equity Research. “US Rig Count Falls on Lower Oil Drilling, Gas Rigs Improve.” Yahoo! Finance.