Ahead of the 30 November OPEC+ meeting, expectations are high for a nine-month extension to the current output cut agreement. High compliance with the agreement is one reason behind Brent crude’s 41% rally since the June 2017 lows, alongside modest US oil production growth this year, booming oil demand, and geopolitical tensions.
But we believe the bullish news is now priced into crude, and prices are likely to be capped:
- With net long positions held by speculators recently hitting a record high, OPEC+ agreeing on the widely expected nine-month extension could trigger a small sell-off. There is risk of further disappointment if a potential mid-2018 review is seen as a shorter extension, or OPEC+ offers insufficient clarity on its exit strategy.
- A very long extension is unlikely, as it would risk oil inventories falling below their five-year average, with prices potentially overshooting and likely igniting increased US shale production.
- While demand growth is expected to remain above trend, we project supply growth will rebound in 2018 driven by higher production in the Americas and OPEC in the second half of 2018. With global demand likely up 1.4mbpd in 2018, we see the oil market balanced next year following a deficit of 0.5mbpd in 2017.
We believe OPEC+ will strike an agreement for a conditional nine-month extension (with an earlier expiration if inventories reach the five-year average before end-2018). Our six- and 12-month Brent forecasts are USD 57/bbl versus USD 63/bbl currently. These prices are, in our view, sufficiently low to prevent non-OPEC supply, i.e. US shale, from growing at the same fast pace as in 2014.
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