Oil Price Outlook
More action needed from OPEC in the short term, but medium term outlook for oil prices improving
After an initial positive response to OPEC’s decision to cut production, oil prices have now fallen close to 12 month lows. Restoration of shut-in production from Libya and Nigeria, both outside of OPEC agreed cuts, as well as a stronger than expected recovery in US production, appears to have undermined the supply/demand balance seen in early 2017.
The outlook for 2018 suggests little improvement in the overall balance and we believe OPEC will need to extend the current agreed cuts and perhaps take further action to normalise inventories. In response to lower oil prices and cost inflation there is a possibility US production growth, which is expected to add 1mmbopd in 2018, may also begin to ease, although we would not expect a significant change. This would certainly help sentiment, but without any supply shocks, oil prices will likely remain in a US$40-60/bbl range.
The implication of a low oil price environment has been a collapse in investment targeting conventional oil resources, which due to the time lag between discovery, project sanction and new developments coming onstream, may risk a supply shortfall in the medium term. Due to operational constraints, we believe US unconventional oil is unable expanded quickly enough to bridge this gap alone and OPEC spare capacity is already far from high leaving the industry exposed to periods of higher oil prices and increased volatility in the medium term.
Our longer-term view beyond 2030 is more cautious as structural changes in the transportation markets erode oil demand growth and possibly leads to so called ‘peak oil’. As discussed on the following pages, leaders in the automotive and oil industry have quite different views on this and public policy will also play a crucial role.
Due to this uncertainty, we recommended avoiding long duration oil stocks, preferring lower cost producers and short to medium term explorers, where the commercial risks are manageable.
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