Oil Price Outlook - Brent: Firming Fundamentals To Lead H217 Price Growth - NOV 2017


BMI View : G lobal oil prices will strengthen from current levels in H217 led by strong compliance to production cuts, slower supply side growth and a seasonal uptick in global crude and fuels demand. Large supply additions will keep prices broadly flat in 2018, before a thinning projects pipeline and strong EM demand push the market into deficit from 2019.

We maintain our forecast for Brent to average USD54.0/bbl for 2017, up from the year-to-date average of USD52.1/bbl at the time of writing. Market consensus has moved closer in line with our forecasts in recent months on both Brent and WTI, to USD54.0/bbl and USD51.1/bbl, respectively. We expect compliance to the OPEC, non-OPEC production cut deal to remain high. Together with favourable demand side fundamentals, this will support prices in the second half of the year. Our view for large supply additions to keep the Brent price flat in 2018 at USD55.0/bbl remains unchanged. However, we expect the current slump in spending to pare back on production growth, driving sharper price gains in 2019 and 2020.

BMI and Bloomberg Consensus*, Brent And WTI Forecasts, USD/bbl
Average YTD Spot 2017f 2018f 2019f 2020f 2021f
*BMI is a Bloomberg consensus contributor; Data accurate as of August 3 2017. Source: BMI, Bloomberg
Brent, BMI Forecast 52.1 52.5 54.0 55.0 61.0 67.0 69.0
Brent, Bloomberg Consensus 54.0 58.0 61.0 65.0 -
WTI, BMI Forecast 49.5 49.7 51.0 52.0 58.0 64.0 66.0
WTI, Bloomberg Consensus 51.1 54.9 58.0 62.0 -

Short Term Outlook (three to six months)

We remain fundamentally bullish on global oil prices for H217. Our Brent price forecast assumes an average of USD55.8/bbl over the second half of the year, compared to an average of USD52.1/bbl in the YTD. On the supply side, compliance with the OPEC, non-OPEC production cut deal has been solid over the first half of the year. OPEC compliance slipped in May-June, as certain countries raised production to meet higher domestic demand during the summer months. However, the bulk of this was consumed internally and does not dent our expectation for compliance levels to remain high over subsequent months.

Compliance To Remain High Despite Summer Slippage
Selected Countries - 2017 Balance Of Production, '000b/d
Source: BMI

Slower Production Growth In H2 Will Support Prices

The impact of the OPEC, non-OPEC production cuts has so far been blunted by the continued recovery in US shale and the return of barrels from Libya and Nigeria. However, it is our view that the bulk of these gains have now been exhausted. Notably, we expect the growth in US shale production to stabilise over H2, due to a confluence of oilfield services bottlenecks, lower debt issuance and tempered capital spending among US E&Ps ( see ' Capital Markets Signalling Continued Slowdown In Shale ' , August 1). Nigeria and Libya are producing at near maximum capacity and we see little further upside from these two countries, without substantial capital outlays. Latent signs of rising political and security tensions in both countries continue to pose production outage risks.

Meanwhile, market sentiment has turned mildly bullish. The ratio of speculative long to short positions has bottomed out and looks set to pick-up in the coming months. Short positions in both Brent and WTI have come down after rising to record highs at end-June, signalling firming fundamentals and shifting sentiment. Technicals look favourable in the short-term. Brent broke out of a multi-month downtrend in July, supporting an emerging uptrend over the coming months. The market remains in contango, though with the contango spread too narrow to offer sufficient cost incentive to keep barrels in storage, we expect stock drawdowns to remain robust over Q3 and Q4.

Sentiment Turning Mildly Bullish
Brent & WTI - Ratio Of Speculative Long-To-Short Positions (LHC) & Managed Money Short Positions (RHC)
Source: Bloomberg, BMI

EM Growth Story Underpin s Positive Consumption Growth Outlook

On the demand side, fundamentals are lining up favourably heading into the second half of the year. In line with our view, emerging market (EM) demand in Asia has performed strongly and will remain so, underpinned by supportive macroeconomic fundamentals.

Notably, China's fuels consumption has outperformed expectations, with strong economic performance in H1 driving positive growth in jet fuel and diesel demand, offsetting slower growth for gasoline. However, risks lie to the downside as we expect the Chinese economy to slow down over subsequent quarters ( see ' Economy To Lose Steam Despite Strong H117 Figure ' , July 17). India's demand looks set for further acceleration in the coming quarters, as demand continues to recover from demonetisation. Overall fuels consumption rose 3.0% on year in Q2, rebounding from a y-o-y decline in the previous quarter.

China, India Driving Global Consumption Growth
Selected Countries - Annual Change In Consumption 2017, 000b/d
Source: National Sources, EIA, BMI

The picture across the rest of the EM space is more mixed. In the Middle East, consumption in Iran and Iraq has returned to growth, while demand in Saudi Arabia is normalising after undertaking large-scale subsidy reforms over 2015-2016. In contrast, Latin American demand will continue to face downward pressure in H2, led by weaker growth in Mexico and Brazil, due to a combination of political and macroeconomic woes, fuel subsidy reforms and FX weakness.

In Europe, Russia is pulling out of recession and we have upgraded our GDP growth for the CEE region. However, rising political risks and currency depreciation are dragging on demand in Turkey. The outlook for Western Europe and North America is more positive, especially as demand hits a seasonal peak during summer. Over the last five years, global consumption has averaged over 1.0mnb/d higher in Q3 versus Q2, led by driving season in the US. Historically low average gasoline prices in the US suggest that demand for automotive fuels will remain robust this year.

Long-Term Outlook (one to five years)

Based on our global supply and demand balance, we see little room for y-o-y price growth in 2018. Our balance shows a tentative surplus next year, despite a solid demand growth outlook. The key issue is the gradual return of cut OPEC, non-OPEC barrels to market, likely from Q218. Saudi Arabia and Iraq have the largest volumes to bring back to the market, and the former's greater flexibility will be pivotal in adjusting production to manage prices.

Thinning Project Pipeline Points To 2019 Deficit
Global - Oil Supply & Demand Balance, 000b/d
f = BMI forecast. Source: BMI

Moreover, we expect large supply additions in a number of markets globally, led by North America, the Middle East, West Africa, Brazil and the UK. With the exception of US shale, the bulk of capital for these projects has already been committed and they will roll on stream regardless of short-term swings in the oil price. However, these projects represent the tail end of the existing projects pipeline. The lack of major project investment decisions taken over 2014-2016 look set to swing the market into a small deficit from 2019, though significant upside in prices will be capped by spare capacity in US shale and Saudi Arabia.

US, ME, Africa To Lead Supply Gains
Selected Countries - Annual Change In Production, 000b/d
f = BMI forecast. Source: National Sources, EIA, BMI

We are constructive on demand across a five-year horizon. China's demand will continue to grow, albeit at a reduced rate, and India will cement its position as a global growth engine, due to a rapid and energy-intensive economic expansion, a rising population and a growing vehicle fleet. Developed market demand will continue in its secular pattern of decline, led by efficiency gains in the transport sector, though sufficiently offset by stronger growth in emerging markets, supported by firming GDP growth and a rising consumer base.

Risks To Outlook

  • Weak driving season in the US (downside)

  • Breakdown of the OPEC agreement (downside)

  • Continued aggressive growth in US shale (downside)

  • Regime collapse in Venezuela and disruption to oil exports (upside)

  • Military escalation between Qatar and the GCC (upside)

  • Persistent production outage risks in Nigeria and Libya as peace talks stall (upside)