Froth coming off the market, but stars still aligned for oil prices. Volatility to pick up over 2018 as the sweet spot matures.
Some froth is now coming off oil prices – a healthy development. But not much has changed in terms of the underlying fundamentals. Higher real interest rates mirror solid global macro momentum and have some way to go before they restrict activity. Demand for crude remains strong and the global inventory glut is shrinking – a supportive combination for prices. In addition, we expect the dollar to remain soft and view output disruptions in Venezuela and geopolitical tension in the Middle East as posing upside risks for prices.
We stick to the scenario laid out in our recent LSR View: 2018 looks to be a sweet spot year for both OPEC and US producers. But with OPEC+ output guidance approaching a crossroads and US supply gathering pace, the sweet spot is maturing. OPEC’s strategy was always to be viewed as a supply taper in the hope of stronger demand. With the global economy on the mend since mid-2016, this hope has materialised. Sustained oil consumption growth is now required for prices to maintain current levels. For the time being, the market looks well supported. But as supply dynamics become more challenging and Goldilocks investing loses its shine, oil market volatility is set to rise.
WTI rose from $59pb at time of publication to $74pb in July, then range traded. The volatility we predicted arrived in early October and prices slid from $76pb to $60pb in a month.