OPEC, with Russia in tow, has done a good job so far. At the end of last year, chronic oversupply was reflected in record inventory levels. The production cuts implemented at the start of 2017 have taken up to 1.4 million b/d of oil off the market, and we expect Brent to average US$53/bbl this year, up from US$44/bbl in 2016. Without these production cuts, prices would be much lower.
Global supply will grow this year by around 0.8 million b/d.
OPEC countries not bound by the agreement (Libya, Nigeria and Iran), and non-OPEC producers Canada, the US and Brazil, will all produce more. US Lower 48 oil is not a big factor in 2017, with volumes up by just 0.2 million b/d, but that's just timing. More tight oil – much more – is coming down the line in 2018 and beyond.
With demand growth this year of 1.3 million b/d, rebalancing is underway.
Falling crude inventories illustrate that point. But instead of heralding the beginning of the end of the oil market down cycle, we may only be near the end of the beginning – OPEC’s battle to win back a degree of control has some way to run.
OPEC faces a trickier balancing act in the year ahead.
On paper, global supply is set to increase by about 2.3 million b/d in 2018; whereas demand is projected to grow just 1.4 million b/d. OPEC has no choice but to extend the cuts in place to end March through the rest of 2018 if it is to avoid a calamitous repeat of the glutted market conditions that led to sub-$30/bbl a couple of years ago. We have been assuming OPEC would extend the production cut agreement through 2018 since June.