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Crude oil rebalancing and global forecasts 2018 – Sonny Atumah

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A new year has come with the crude oil market expectedly teetering along uncertainty and volatility. Many crystal gazers are starring into crystal balls for a pleasant prospect in 2018. Some believe that the fortune tellers’ globe may have been infiltrated and manipulated by two groups of petroleum marketeers. The two groups are relishing in diametrically opposite geopolitical zones to convince global citizens of what to expect in 12 calendar months. Experts say the long-term equilibrium of the market is expected to reflect prices that result in a reasonable supply-demand balance in a price range that would be neither high nor low.


Who carries the investment crowd is now in the big names of the petroleum divide. It is therefore doubtful if forecasters’ game of market rebalancing in 2018 may not be swayed by the group with firmer price speculative grip. The International Energy Agency, IEA, however, foresees an uncertain outlook for crude oil. It has routed out its motives for tight or shale oil producers in the Organisation for Economic Cooperation and Development, OECD. This group is alleged to have engaged the Organisation for  Petroleum Exporting Countries, OPEC on the other divide in a ding-dong battle of wills that would be decided by the figures as they tilt. OPEC as a group is leaning on Russia and allies cooperative compliant stance on output cut as it was in 2017 and predicting a rosy outlook for 2018. The OPEC and non OPEC alliance made the crude price soar above the US$60 per barrel mark into the New Year.

The IEA predicts that OPEC and non OPEC will bring in more crude than the market wants making it extremely difficult to rebalance in 2018. Its assumption is based on the fact that after March 2018, compliance level would likely decrease because Russia is in a game that favours a high inventory to reduce the cost of crude below US$60 per barrel to knock off the United States shale oil producers. Again, the United States Energy Information Administration, EIA predicts that the United States output would reach 9.99 million barrels of oil per day, bopd in May and that would surpass Saudi Arabia’s curtailed production of 9.77 million bopd.

Derek Brower reported in the Petroleum Economist that the upshot, from OPEC, is that demand for the group’s own oil will rise by 300,000 barrels per day in 2018 to an average of 33.2m. Last November, OPEC produced 32.5million barrels per day, so the gap is big. Keeping it open is part of the plan, because the group wants to eradicate the surplus in the OECD’s commercial stocks—the easiest way, it believes, to bring supply and demand into balance. The IEA’s numbers now paint a much less certain outlook for the rebalancing. For a start, its monthly report, released in December, expects 200,000 barrels per day less demand growth in 2018 than OPEC’s (1.3million barrels per day as against 1.5million barrels day). It also expects much higher growth from non-OPEC: an increase of 1.6million barrels per day compared with OPEC’s forecast of 1million barrels per day.

Industry watchers believe oil prices would firm up as the market balances, and especially as inventories begin to shrink towards more normal levels. But if supply drops below OPEC forecast level of 32.5 million barrels per day the gap may be filled by non-members like Russia that are waiting to back out of the 2017 deal extension. The group expressed concerns that a further price strength would spark a supply reaction from US shale producers. The IEA reports that tight oil producers are hedging, and that Permian and Bakken producers have sold substantially their 2018 output.

Experts believe the scenarios are causing investors to waver, as the United States shale oil will boom in 2018, undercutting OPEC’s push to drain a global glut. Late December Saudi Arabia’s Energy Minister Khalid Al-Falih said that OPEC will look at the supply, demand and inventory data and if any of the variables deviates significantly, it will be considered. OPEC and its non-OPEC allies agreed to review production cuts in June 2018, three months after the original expiry of March 2018 to ascertain whether the rebalancing has been sustained.

The Saudi Minister had sounded bullish on his outlook for 2018. He painted the picture of Saudis ready to go further in output cuts; a move many believe would favour his country’s Initial Public Offering, IPO. The US$2 trillion IPO is a 5 per cent stake in Saudi Aramco to be sold in the world’s biggest floatation. Coming on stream in 2018, the IPO date may likely be moved from the latter half of 2018 to the second quarter, to fall within the OPEC and non-OPEC production cut review period in June. In 2018, Saudi Arabia would continue to be the beautiful bride as global financial centres jostles for the sale of 5 percent of its shares in Saudi Aramco.   Again, the Fragile Five petro states of Iran, Iraq, Libya, Nigeria and Venezuela would cause supply disruptions in 2018.

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