The oil market has never looked more stable in years as it does now.
Oil prices are set to end the year with a bang and everyone is looking at 2018 with wonder.
What to look out for in 2018?
U.S. shale growth
U.S. shale output will continue to rise but by how much is uncertain. There have been numerous red flags that raise a lot of questions about the health of the shale industry. As operation costs increased, drilling companies are reporting losses which illustrate that the industry’s break-even price has been grossly miscalculated. The IEA reports suggest that shale will rebalance next year.
OPEC playing nice
OPEC production declined in November for the fourth consecutive month. The group’s compliance rate with the production cuts is at 115%, the highest number yet, this is a positive sign heading into 2018. It is expected that OPEC will extend the production cut agreement into the second quarter of 2018.
OPEC’s strategy will primarily come down to what happens to global inventories. The stock surplus is now at about 100 million barrels more than the five-year average, down two-thirds from the start of 2017. It’s likely that the excess will be erased at some point in 2018.
All of these forecasts and predictions will become void if supply disruptions occur. Forties, the largest oil field in the North Sea, shut down recently due to cracked pipelines and could be closed for weeks. This incident highlights the type of event that can catch the oil market by surprise, leading to sharp and sudden price increases even if all seems well elsewhere in the world.
Venezuela remains a concern as the oil producing company production declined by 42,000 bpd. Current output is at a 30-year low and is anticipated to get worse before it gets better. Other countries like Nigeria, Iran and Libya can have serious implication for the oil market if a conflict arises. It only takes one significant disruption to upend the most carefully crafted oil forecast.
That said we remain optimistic and estimate that Brent will hit the $60-$65 per barrel mark next year.
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