Oil price forecast: Crude turns sideways, correction coming soon

Oil price forecast: WTI crude oil prices in recent weeks have entered the consolidation phase majorly within the range of February’s selloff from $65.4/bbl to $58.1/bbl, which was caused by the US stock market correction and rebound in the USD. Record US production and its possibility of surpassing the level produced by the world’s ace producer Russia by the 2018 end seems to have taken drivers’ seat this time, hindering the OPEC and Russia’s joint efforts of reducing the global supply glut and market rebalancing.    

OPEC led 1.8mbpd supply cut has faced strong standoff from soaring US production, which has risen about 25 per cent since mid-2016 and is expected to contribute major part of global supply rise this and next year. No doubt OPEC’s intention of market rebalancing and popping the prices up have worked well in their favor so far but at the cost of market share, which they have lost to the US shale producers. 

Tug of war between rising US production, exports & inventories with OPEC led supply cut, strong demand & robust global economic growth forecast have confused the traders, leading to such in range consolidation wherein bulls are getting enough reason to take a charge near $60-$58 vicinity and bears are finding it overpriced near $64.5-$66.8 zone. And this range is likely to prolong some more time before dust gets settled and realistic fundamental factors will start having bearing on the prices.  

Stronger then expected reduction in the OECD inventories towards 5-Year average, which OPEC has adopted as a benchmark for measuring the effectiveness of the production cut pact, had triggered strong prices rise in Q4, 2017 and January 2018, taking the prices to a 4-Year high of $66.8 per barrel in January and Brent oil close to $70/bbl but recent series of upward revision in the global supplies led by the US had held back the relentless rise.

Reports from prominent oil agencies IEA, OPEC and EIA echoed concerns over rising supplies despite strong demand projections, implying an oversupplied market conditions for some part of this year. Crux are as under:

The IEA in its Oil Market Report, March issue said supply from outside OPEC, led by the US, would grow by 1.8mbpd in 2018 versus an increase of 760,000bpd last year. The supply increase is more than the IEA's expected demand growth forecast for this year of 1.5 million bpd. They also said that global supply went up by 0.7mbpd in February from a year ago to 97.9mbpd. The agency also reported that commercial oil inventories in industrialized nations rose in January for the first time in seven months. 

OPEC MOMR March issue outlined that oil consumption would grow by 1.62mbpd in 2018 while, Non-OPEC supply would grow by 1.66mbpd in the same period, mainly led by US shale production. OECD total commercial stocks, which had fallen to 2851 million barrels in December 2017 from January 2017’s level of 3070 million barrels, have gained first time in seven 7 months by 13.7mb M.o.M. to 2865mb in January 2018, report further stated. OPEC combined output dropped by 77,000bpd to 32.186mbpd in February led by declines in Iraq, UAE and Venezuela. OPEC oil demand is forecast at 32.6mbpd this year, down by 0.2mbpd from February assessment.  

EIA, in its STEO March issue, forecasts that US production will average 10.7mb in 2018 and 11.3mb in 2019 from 2017’s average production of 9.3mbpd. US oil production, driven by shale extraction, have rose to an all time of 10.38mbpd in the week ended March 09, staying above top exporter Saudi Arabia’s output level and marching towards top producer Russia. Estimates by the EIA also show global supplies will rise above 100 mbpd for the first time in the Q2 of this year, while demand will only surpass that level in the Q3.

Iranian oil minister recently opined that OPEC could agree in June to begin easing current oil production curbs in 2019. Iran also wanted OPEC to work to keep prices around $60/bbl to contain US shale production. If prices jump to $70, it will motivate them to pump more and more oil. Well, we still believe OPEC will have to continue output cut agreement for longer period or have to forgo some part of it for forever. 

As per Baker Hughes report, US oilrig counts, an indicator of future output, rose by 4 units 800 units in the week ended to March 16 against 631 units seen during same period last year.  

CFTC crude oil speculative net long positions fell further to 668.5k in the week ended March 16 from a week earlier level of 686.5k and fortnight ago level of 704.1k, hinting traders are pessimistic about near-term price rise.

(By Tarun Satsangi, Head of Research - Commodities and Currency at Global Commodities)