Daily Insight: Oil prices – Further rally on the horizon?

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In the first half of the year, oil price outpaced our estimate of average $55-$60/b, touched a high $79.8/b and recorded 18.8% appreciation. This rally was triggered initially by OPEC+’s decision to cut production but further fueled by an inadvertent fall in supply in Venezuela and Libya. As at May-18, compliance to OPEC’s production cut stood at 152.0%, cutting deeper than anticipated into oil supply dynamics.

Heading into H2-18, factors that point to further rally despite OPEC+’s decision to bring compliance level to 100% include; the geopolitical tensions in Venezuela and Libya which could continue to weigh on global supply, weaker US shale production which plateaued due to constraints in pipeline capacity, and the ongoing political spat between Iran, the fourth largest oil producer in world, and the US which may further worsen supply deficit.

The IEA’s July Oil Market Report (OMR) raises concern that potential rise in production from Middle East Gulf countries i.e. (Saudi Arabia and UAE) and Russia comes at the expense of the “world’s spare capacity cushion” while higher prices are prolonging fears of damage in consuming economies and could have a marked
impact on oil demand growth. In the light of the foregoing, we revise our projection for average oil prices to $68-$75/b in 2018.

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