The decision coming out of the upcoming meeting presents a tricky balancing act: how best can OPEC reintroduce its supply over time while avoiding oversupply and a sharp fall in oil price? Our leading experts in oil price examine four options for OPEC as it gathers in Vienna this week.
Back in January 2017, we argued that OPEC would roll over its agreement through H2 2017. On that basis, we forecast Brent would average US$55 per barrel (bbl) this year. We analysed 2018 on the basis of no production cuts next year. The annual average price for Brent was forecast at US$50/bbl on this basis because, as the chart above shows, total oil supply would grow 2.4 million b/d in 2018 compared with world oil demand growth of 1.2 million b/d year-on-year in 2018.
If OPEC stops trying to support oil prices and seeks market share instead, we would see OPEC and Russian production start to rise in H2 2017 and continue to increase next year. This would put significant pressure on prices, which could fall to an annual average of US$43/bbl for Brent in 2018. While we do not believe this outcome likely, examining the risk of it highlights the significance of the current agreement to the market.
In the run-up to the meeting, some members within OPEC briefly considered the option of deeper cuts on top of the production restraint already in place. The benefit would be a larger implied stock draw in Q3 2017 than we currently forecast — potentially as much as 1.8 million barrels per day (b/d) — helping to clear current oversupply. This would lead to higher prices in the second half of this year, with Brent forecast to rise just above US$60/bbl at the end of the year.
However, OPEC is currently discussing a Saudi-Russia proposal to extend the existing production cut agreement through Q1 2018. To date, this is the most likely outcome from the 25 May meeting, but it is a fluid situation with negotiations underway in Vienna. A nine-month extension would have little impact on our price forecast for 2017 at an annual average of US$55/bbl for Brent. Into 2018, we expect Brent would average at least US$55/bbl on a monthly basis. With oil prices at or above US$55/bbl during 2018, rig additions in all tight oil plays would be higher than in our base case from 3 May.
For a year-on-year comparison, US production would rise 0.95 million b/d in 2018, or 150,000 b/d higher than if the rollover were only extended for 6 months, through H2 2017. The rate of US production growth in H2 2018 would be the fastest seen since the recovery started, with consecutive months of 100,000+ b/d of growth.
Finally, OPEC could also extend the existing agreement through the whole of 2018. Although this scenario would have little effect on our near-term base case, it would lead to a tighter supply/demand balance through 2018. The annual average for Brent in 2018 could be as high as US$63/bbl. Prices holding above US$60/bbl means stronger investment in almost all US tight oil plays. The trajectory of our rig forecast in this case suggests annual growth rates of over 1 million b/d are easily achievable in 2019 to 2021.
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