FxWirePro: A bird’s eye-view on global crude forecasts turning the table and WTI-Brent spreads

If you glance through the crude oil prices (Brent) that have risen by 16% especially in 4Q’17 and over 13% since mid-December 2017.

Given the latest rally swiftly catching up on two of our last upward revisions, we have decided to raise our price forecasts once again to stay bullish, on the back of stronger than anticipated fundamentals mainly demand driven for 1H’18 and we bring forward our support to prices in 1H’18 as we had initially mentioned in our weekly on 12 Jan 2018.

We have revised our 2018 price forecasts by $10/bbl to $70/bbl for Brent and by $10.7/bbl for WTI to $65.63.

We expect Brent to touch close to $78/bbl towards the end of 1Q’18 or early 2Q’18 but that trend should reverse towards the end of the year with Brent averaging $60/bbl in 4Q’18.

One of the key reasons to revise our forecasts up has been the higher than expected demand growth materializing in 1H218 as explained earlier. Also despite the substantial shale growth on the back of higher oil prices, we believe the market will be able to absorb that extra oil, even if conditionally on an OPEC-NOPEC deal.

Our revised balances suggest markets will reach the 5-year OECD stock average earlier than expected by OPEC. This is caused by OPEC-NOPEC deal unintentionally ending up tightening markets faster than they had initially planned for as demand helps absorb that extra barrel on the back of global synchronized economic growth.  And given the OPEC and NOPEC commitment to the existing deal to extend to the end of 2018 as announced in the joint ministerial meeting in Oman, we see markets will remain supported in 1H’18.

We also think Saudi Arabia has a good reason to keep this deal going and perhaps expedite the launch of Aramco IPO.

However in 2H’18, markets shall take count of the impact of higher oil prices on supply (as shale supply increases rapidly and other non-OPEC producers), potential impact on demand growth (as demand could soften due to higher oil prices after a lag effect perhaps towards the end of 2018), and also the OPEC-NOPEC deal being phased out discreetly as OPEC is not very efficient at announcing an end of production cut deal as opposed to announcing a production cut agreement.

For now, WTI crude futures tumbled $2.08, or dropped to $64.14 in this week (10:50 GMT), lingering near its lowest level in around a week.

Meanwhile, Brent crude futures, the benchmark for oil prices outside the U.S., declined 42 cents, or roughly 0.6%, to $68.10 a barrel, after losing 68 cents, or 1%, a day earlier. WTI-Brent spreads would go through an accordion effect in 2018 as oil supply growth would compete with taking oil away capacities. Courtesy: JPM