2018 will be a sweet spot year for both OPEC and US shale.
Vienna’s output cut deal between OPEC and Russia (‘OPEC+’) marked an inflection point for global oversupply. It has been running for almost a year now. Against the backdrop of benign global growth, it has broadly succeeded in putting a floor under prices, despite US shale oil production levels continuing to rise in 2017. We regard the current apparent ‘truce’ between OPEC+ and US shale as an unstable equilibrium. US operators are currently in a sweet spot, but they running on borrowed time, not least as Russia’s incentive to continue cooperating fully is likely to dwindle going into H2 2018.
The paring of speculative shorts over the summer has gradually given way to a build-up of long positions, as a tighter market has tipped the forward curve into backwardation, propelling WTI prices towards the upper end of the $50-60/bbl range. This represents a sweet spot for OPEC.
Let’s say that things stay roughly as they are in the foreseeable future, with Riyadh managing to keep the alliance intact; US shale producers sticking with a more balanced approach; global demand continuing to grow at a healthy rate; and the inventory glut receding. At the current pace of drawdowns, ‘price stability’ could be achieved around the end of H2 2018, precluding the need for further extensions.
WTI oil price rose by 29% from $57.22pb when we published to $74pb in the first week of July2018. The sweet spot had matured and oil range traded around $70-75bp to September.