Investors are complacent because inventory levels remain high and are expected to buffer any future imbalance. This is no different than the peak of the last cycle in July 2016— an especially important fact no energy analysts have commented on. In 2016, OECD inventories were 450 mm bbl above long-term seasonal averages and wisdom dictated it would take years (if ever) to work off the overhang. On July 31st 2016, with oil at $40 per barrel, analysts expected prices to remain lower for longer. In fact, it only took 18 months to work off the overhang. By the summer of 2018, inventories were back to near long-term averages and prices had rallied to $87 per barrel.
Despite the unprecedented disruptions caused by the coronavirus, June OECD inventories stood only 400 mm bbl above long-term average levels – less than the 2016 high point. Collapsing supply this cycle will draw inventories down much faster than in 2016-2018, a period that enjoyed robust shale growth. Instead of working off the inventory overhang in 18 months, our models suggest this could happen as soon as 2021.