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.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.