Syria aside, oil risks remain skewed to the upside

Thought of the day

by Chief Investment Office 16 Apr 2018

Brent crude fell as much as 2% on Monday after limited US-led air strikes against Syria reduced market fears of further military escalation. US President Donald Trump tweeted “mission accomplished” while UK Foreign Secretary Boris Johnson noted there was “no proposal on the table” for further strikes.

The market impact of political risk events often tends to be short-lived. But, even if geopolitical tensions subside, further downside in oil prices is likely to be relatively limited, as the fundamentals have become more supportive:

  • The International Energy Agency noted last week that the excess in oil inventories, measured against the five-year average, has slimmed down to just a tenth of its January 2017 peak. The five-year average is OPEC’s target, but the cartel and its allies now aim to err on the side of overtightening the oil market.
  • 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.
  • 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 0.5m bpd deficit in 2017, with the risks tilted to another small deficit in 2018.

In view of lower OPEC supply, new supply risks and stronger demand, we recently 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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