2017 was a tale of two halves of the oil market, with lower and more volatile prices in the first half, and a rally in the second half of the year. The bottom line for the oil market is that OPEC production cut is providing a floor for oil price at $40 per barrel, while US shale producers are providing a ceiling for oil price at $60 per barrel.
Looking into 2018, we see reasons to believe that the recent oil price gains will moderate. On the supply side, World Bank projects an increase in non-OPEC supply, led by U.S. shale producers. Additionally, increased hedging activities by U.S shale producers and a clearing-up of logistical challenges caused by the recent hurricane, suggest a production surge in 2018.
On the flip side, world oil demand is projected to increase but at a decreasing rate in 2018, and beyond, as long-term challenges from the rise of electric vehicles and other low carbon means of transportation emerge. Considering the aforementioned, we see oil prices averaging $55-$60/bbl in 2018.
Upside risks to our forecast include geopolitical tensions in the middle east, stronger than expected demand, and a slowdown in U.S. shale production. On the downside, weaker compliance to the production cut agreement, slower demand growth, and a higher than expected rise in U.S. shale production could delay the rebalancing.