The oil market outlook is always a bit complicated, in part due to the impact OPEC can have on balances. For all the attention paid to changes in U.S. shale output, OPEC is capable of swinging oil balances more in a single month than U.S. shale can in a year. As a result, any oil outlook must make some material assumptions about OPEC’s intentions at the upcoming meetings later this month and in November.
Rewinding to 2016, the oil market hit an inflection point in the summer as declining non-OPEC output and strong demand signaled a nascent market rebalancing. A fourth-quarter surge in OPEC output looked set to delay rebalancing by yet another year before last-minute negotiations between OPEC and key non-OPEC producers, mainly Russia, led to an agreement to curtail output, accelerating the drawdown of surplus inventories in 2017.
While this deal has reignited non-OPEC investment, we expect OPEC to maintain discipline through year-end 2017, allowing inventories to continue to normalize. The main risk is that OPEC fails to renew the deal and increases output just as the supplies resulting from short-cycle (primarily shale) investment in the U.S. begin to accelerate.
Our baseline view is that OPEC will see an incomplete job when it meets on 25 May and extend the deal – and as a result, we expect Brent to average in the mid-$50s in 2017 and 2018. We could revise our price view higher should production costs begin to pick up at a faster rate than producers can improve efficiency.