Why to expect downward pressure on oil prices in 2018?

Baku, Azerbaijan, Dec.4

By Leman Zeynalova – Trend:

The extension of OPEC oil output cut deal should support prices at close to $60 per barrel in 2018, according to the analysis of the US JP Morgan Bank.

Earlier, OPEC announced that it, along with Russia and several other non-OPEC producers, had reached an agreement to extend its production deal for a further nine months. This would shift the expiration date of the agreement from March to the end of 2018. The agreement is on the same terms as those agreed in November last year.

“The 173rd Meeting of the OPEC Conference has concluded with an agreement to extend the current deal for a further nine months. This is in line with market expectations and should support prices at close to $60 per barrel in 2018,” said the bank.

The analysts pointed out that compared to market expectations, two unexpected twists have appeared.

“First, the deal is re-struck to start from January 2018 and run for 12 months. Second, the agreement now has a formal review in June 2018 to assess market conditions. This raises the prospect of the production cuts possibly being removed ahead of the end-2018 timeframe that the market consensus had envisaged. Markets have increasingly moved to discount the prospect of this deal being perpetuated until end-2018,” said the analysis.

Moreover, UK-based consulting company Capital Economics believes that while compliance with the agreement has been better than expected and crude stocks have been drawn down over the past year, market rebalancing has been slower than the cartel had anticipated.

“We still expect some downward pressure on prices over the next year. Our forecast is for Brent to end 2018 at around $55 per barrel,” said Capital Economics.

JP Morgan believes that the inclusion of Nigeria and Libya in the 2018 production agreement is clearly a bullish development that removes the risk of a production surge by either country, even though the chance of this was minimal.

“Similarly, the prospect of an additional six countries who might subsequently sign up for membership of the deal is supportive of prices. So too, the talk of being increasingly agile next year and the prospect of a mid-year on the scale of the production cuts might yet undermine market confidence in the longevity of the deal,” said the analysis. “For now, prices remain well supported as inventories draw and product markets tighten. We expect seasonally weaker demand in 1Q18 to weigh on prices, but sustained healthy economic growth, robust demand growth and potentially strong weather-related demand still present upside price risks at this juncture.”

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Follow the author on Twitter: @Lyaman_Zeyn

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