Crude thinking: there's more to oil than OPEC output cuts

Thought of the day

by Chief Investment Office 20 Feb 2018

Crude prices gained as much as 1.7% after OPEC announced strong compliance with output curbs on 19 February. High compliance, which reached 133% in January, follows comments by Saudi Arabia’s energy minister that OPEC+ should persist with output cuts, even if the result is a small supply shortage.

But, while the comments have provided short-term support, we see reasons for oil prices to move lower:

  • The compliance figures don’t include Libya and Nigeria, where output is rising. High compliance also reflects falling Venezuelan output, where the decline is not through a desire to comply, but due to previous underinvestment, the impact of sanctions, and the replacement of oil industry officials with non-specialist military personnel.
  • We project oil supply growth will rebound in 2018. US crude production topped 10m barrels a day in November, and we forecast it to increase by 1mbpd this year, with risks strongly skewed to a higher outcome if current prices are sustained. We believe OPEC production is likely to rise in the second half, as OECD inventories are expected to be back at the cartel’s target by mid-year.
  • Growing US crude production and rising US crude inventories could trigger a further liquidation of record-high speculative oil holdings in crude oil futures.

We are monitoring developments – particularly potential renewed sanctions against Iran and Venezuela, and the possibility that OPEC over-tightens supply. Our base case remains that the oil market will move into supply-demand balance this year, following an expected deficit of 0.5mbpd in 2017. We forecast WTI crude at USD 53/bbl in six months (versus 62 currently).

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