Why we don't expect the oil rally to last

Thought of the day

by Chief Investment Office 04 Jan 2018

Brent crude futures rose as high as USD 68.27 a barrel (bbl) on 4 January, a level not reached since May 2015. The move came partly in reaction to political protests in Iran and cold weather in the US. Brent crude prices are now up by more than 50% in less than six months.

While Middle East political unrest often sparks a short-term crude price rise, we see three reasons why the boost is unlikely to endure.

  • The path of politics is never certain, but there are no signs that the unrest is affecting Iran’s production of about 3.8m barrels per day (bpd). Nor is there evidence that the turmoil may prompt strikes in the country’s oil fields.
  • Higher prices are likely to draw further US shale investment and could boost supply growth beyond 1mbpd this year. The most recent data showed US shale production up markedly in September (+3% month on month) and October (1.8%), despite October Gulf of Mexico production being disrupted by Hurricane Nate.
  • While oil demand growth is expected to remain above trend (+1.4mbpd), we project overall oil supply growth to rebound even faster (+1.9mbpd) thanks to higher production in the Americas and OPEC in the second half of the year. We forecast the global oil market to be balanced this year following last year's estimated deficit of 0.5mbpd.

The upward pressure on oil prices should abate as the focus returns to underlying market fundamentals. Lower prices are needed to prevent increased non-OPEC supply (i.e. US shale). We forecast Brent crude oil to weaken to USD 57/bbl over six and 12 months.

Do you like this?

Please click below to sign up for more investment views.