Accelerated rebalance
On 30 November 2016, OPEC and select non-OPEC oil exporters agreed to 14 December 2016 cut output by a combined 1.76mmb/d in 2017, prompting us to review our short-term oil price assumptions. OPEC views this as a necessary catalysis of the rebalancing process to secure medium-term oil supply and the role of crude oil within the global energy mix. Assuming OPEC’s 14 members (OPEC-14) and Russia comply with >70% of pledged output reductions in early 2017, we expect global inventories to fall in Q217, reaching the top of their five-year range by the end of 2017. We estimate that OPEC compliance will accelerate crude oil inventory draws by around six months from earlier IEA forecasts (November 2016 oil market report). We maintain oil price assumptions in line with the EIA at $51.7/bbl in 2017, rising to $70/bbl (real) long term – minor adjustments from our forecasts in June 2016.
Rebalance pulled forward by six months
Supported by a group of non-OPEC oil exporters, OPEC has catalysed the oil market rebalancing process by pledging to reduce output by a combined 1.76mmb/d over the next six months. A monitoring and reporting committee consisting of a handful of member countries is being put in place to ensure compliance across the cartel. Prompt oil prices have rallied since OPEC’s announcement, with 12-month spreads reducing by c $10/bbl. A further shift in term structure, moving the market into backwardation, will require OPEC and non-OPEC adherence, as well as sustained positive demand trends from India (strong Q316 imports) and China (recovery in October PMI).
Implied volatility remains high
Despite pledges to reduce output from 25 countries, uncertainty over short-term oil prices remains high. The exact timing and magnitude of production cuts, elasticity of US shale to higher prices and emerging market demand growth all remain key uncertainties. Our 2017 Brent crude price assumption is in line with that of the EIA December 2016 short-term energy outlook at $51.7/bbl, despite a rally in Brent since the EIA publication. Oil price uncertainty remains high with the 95% confidence interval for December 2017 Brent ranging from $28.6/bbl to $94.4/bbl. We expect the market to keep a close eye on OPEC tanker exports, Russian output, US onshore activity levels and global PMI data over the next six months.
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