The significant OPEC cuts apparently under way. Global crude demand would drop seasonally, but US crude supply is growing again. US crude demand is declining seasonally.

The US crude demand is dropping seasonally. Latest US 4w av product demand very weak.

Buy Dec-17 WTI on dips The OPEC agreement to cut output by 1.2 Mb/d from January this year together with the possibility of non-OPEC cuts of some 600 kb/d should result in meaningful global oil stock draws next year (even if full compliance is unlikely).

Therefore, we see scope for WTI to approach $60 by end-17. Annual global oil demand growth is forecast at a healthy 1.25 Mb/d in 2016 and 1.26 Mb/d in 2017, driven by emerging markets, especially China, India, and other non-OECD Asia.

The US output continues to be an important driver for non-OPEC supply as a whole. Annual US liquids production including crude and NGLs is forecast to decline by 0.48 Mb/d in 2016, but to reverse course and increase by 0.16 Mb/d in 2017. Annual US output of crude (only) is projected to contract by 0.57 Mb/d in 2016, but to decline by a smaller 0.16 Mb/d in 2017.

We expect shale supply to stop declining and bottom out in Q2'17 and Q3'17, before starting to gradually grow again in Q4’17. Most shale oil full-cycle production costs are down some 30% since Q4’14 and are centered on $40-45 (WTI equivalent).

WTI has averaged in the $45-50 range since Q2'16 and due to the persistent contango on the forward curve (front-month vs one-year forward time spreads have consistently been in the $3-6 range), producers have been able to lock in higher prices through hedging (selling forward).

As a result, US E&P capital spending has begun to stabilize with gradual increases expected; US oil-directed drilling has been gradually recovering since June. The prospect of a gradual recovery in US shale production next year is likely to slow the uptrend in oil prices. We recommend buying Dec-17 WTI on dips with a target at around $60.

Alternatively, on speculative grounds, initiate shorts in 1W OTM put (1% strike difference referring lower cap) and short OTM call simultaneously of the same expiry (1% strike referring upper cap) (we reiterate, preferably short term for maturity is desired).

Overview: Slightly bearish in short term but sideways in the medium term.

Time frame:  7 to 10 days.