12 January 2018
On January 11th 2018, Brent crude oil reached $70 / bbl for the first time since December 2014. This marks a 55% increase in price over the past six months, and is proof that OPEC’s policy of tightening the oil market by cutting supply is starting to bear fruit.
But is OPEC in danger of over-tightening? First, let’s consider what OPEC’s end game is. When OPEC first implemented cuts in Jan’17 it was with the stated aim of reducing OECD oil inventories back to 5-year average levels. Looking at our “Chart of the month”, we can see that inventories at the start of 2017 were approximately 270 million barrels above the 5-year average, and this surplus was evenly weighted between crude and products. Fast-forward to Oct’17 – the last month for which the IEA has published data – and the surplus had fallen to 100 million barrels, most of which was crude. Clearly, OPEC’s plan is working.
At its last full meeting in Nov’17, OPEC voted to extend supply cuts to the end of 2018 in order to rebalance the oil market. But there is a real chance that this balance will come much sooner, in which case we may see OPEC increasing oil supply before the end of the year.
Assuming OPEC maintains its discipline, the fate of the oil markets lie in two variables; global oil demand, and US oil production. On the one hand, it appears as though global oil demand may be much stronger than is being forecast by the global forecasting agencies, which could help eliminate the product overhang fairly quickly. On the other hand, US oil production is accelerating at a faster rate than expected, which could maintain the crude surplus for longer.
Trying to predict how these variables will play out is no easy task; however, our best guess at the moment is that OPEC will gradually start returning supply to the market in 2H-2018, which will help kick-start a tanker market recovery towards the latter part of the year.