2018 Outlook: what to expect from Crude Oil

The price of oil continued its recovery from the middle of 2017 as global crude stockpiles fell from record high levels.

The price of oil continued its recovery from the middle of 2017 as global crude stockpiles fell from record high levels. As well as rising demand, a fall in supply growth was also responsible for the reduction in inventories. This was due above all to the OPEC and Russia’s agreement to reduce their crude production by about 1.8 million barrels per day. This agreement was extended by another nine months to the end of 2018 at the cartel’s latest meeting at the end of November 2017. 

The OPEC also agreed to review the duration of oil output cuts based on fundamentals at its next meeting in June. This means there is a possibility they could end the agreement sooner than expected, which is somewhat bearish, we think. With oil prices being already significantly higher compared to their 2016 lows, there will be less incentive for the OPEC and Russia to maintain their oil supply collusion, especially as US shale producers continue to win market share. 

Thus there is risk that the agreement could end prematurely, resulting in another supply war. Indeed, it will be rather easy for US shale producers to ramp up oil output when prices rise above their production costs. We think oil prices will struggle to go north of $65-$75 per barrel for this reason. However, we don’t anticipate seeing low $40s, let alone $30s, again as the fundamental picture is a lot healthier compared to a few years ago.

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