Why pipeline problems won't provide a lasting boost to oil

Thought of the day

The unscheduled shutdown of a key North Sea pipeline has sent Brent crude prices up 3.5% to a 30-month high. The Forties pipe will close for two to three weeks, interrupting the source of nearly half of the Brent Forties Oseberg Ekofisk stream, which sets the European benchmark price. The disruption comes as a cold snap in the UK may lift demand, and after OPEC+ last month extended its production curbs to the end of next year.

A short-term adjustment to Brent prices is in line with past stoppages. But we see several reasons that crude prices will likely consolidate and stabilize into next year:

  • Higher prices will draw further US shale investment, boosting Americas supply growth in 2018. Chevron has already said it will raise upstream capex 15% in 2018 to USD 6.6bn.
  • OPEC+ is slated to review its curbs when it meets next June; higher prices would cause support to fizzle out, in our view. We expect greater OPEC production in 2H18.
  • Price volatility in part reflects already tight supplies, with the market in a deficit of 0.5mbpd this year. While global demand growth will remain above trend next year, rising about 1.4mbpd, higher supply growth in 2H18 should leave the oil market balanced.

While the shutdown may support short-term prices, pipeline repairs will soon return the disrupted North Sea supply to the market. We expect Brent crude prices to level off, and maintain our six and 12-month Brent forecasts at USD 57/bbl.

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