FxWirePro: WTI supply-leg swings to lead price outlook

The key pivot points in our price outlook remain dominated by supply-side developments.

OPEC’s agreement will tighten balances in the short term. We look for a flatter futures curve structure to reflect the need to draw barrels from storage on a sustained basis in the coming quarters.

Yet, higher prices are stimulating the US shale producers to lift activity. The US oil rig count has recovered to its highest level since November 2015, driven primarily by increases in Texas as Permian activity races ahead. There appears to be no comparable increase elsewhere in the US at this stage, despite improving economics for drilling in other shale plays.

The inference:

The consequences of OPEC’s actions to support prices in the short term will extend into 2018. The 23% increase in crude prices since late November has bolstered US shale drilling activity, by removing uncertainty about the short-term price outlook and allowing producers to hedge 2017 and 2018 production at $55-56/bbl on WTI for the past seven weeks. Prices have further to run up in the short term as markets draw oil inventories, and mid-$60s on Brent by July is still very likely if market developments are as expected.

2018 forecasts envisage prices remaining weak to start the year. The fall-out from OPEC’s agreement concluding in H2'17 results in resurgent OPEC crude production coinciding with higher US supply.

However, demand growth should be sufficiently strong to tighten markets once again after mid-year and the prospect of tighter markets is sufficient to keep prices supported in the mid-$60/bbl range by the end of next year.

We retain our bullish trade recommendations that seek to benefit from higher outright prices and flatter curve structure in the months to come.