Risks to crude oil tilt towards the upside

Thought of the day

by Chief Investment Office 06 Apr 2018

Unsettled by the tit-for-tat trade dispute between the US and China, Brent crude was trading 0.3% lower on 6 April and has fallen 3% since the Easter break.

But we see reasons why the downside in oil prices may be limited from here. Our base case is that trade frictions will not significantly disrupt global trade, and the fundamentals have turned more supportive for oil prices:

  • By mid-year, declining OECD oil inventories are likely to reach OPEC’s target of the five-year average. We had originally expected OPEC to increase production in 2H18, but OPEC and its allies now aim to err on the side of overtightening the oil market.
  • OPEC crude supply in 2017 was 32.3mbpd, below our estimate of 32.5mbpd, due to a steep production decline in Venezuela. For 2018, we now expect OPEC crude output to be 32.3mbpd – well below our previous estimate of 32.9mbpd. Production disruptions in OPEC countries could further reduce our 2018 estimate, particularly if potential US sanctions impact Iranian and Venezuelan production.
  • Non-OPEC supply growth this year is likely to be stronger than we expected -1.8mbpd, versus 1.3mbpd previously. Demand growth has been stronger too. Our view that non-OPEC supply growth will outpace demand growth this year remains unchanged. We continue to expect a balanced oil market in 2018, versus a 0.5mbpd deficit in 2017, but the risks are tilted to another (small) deficit in 2018.

In view of lower OPEC supply, new supply risks and stronger demand we have raised our oil price forecasts. We now expect Brent to trade at USD 65/bbl in six months (previously USD 57/bbl) and USD 62/bbl in 12 months (previously USD 57/bbl).

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