Authored by Nick Cunningham via OilPrice.com,
Oil prices are in a holding pattern as we await the outcome of the OPEC+ meeting in a few days...
...and while the result of that meeting will almost completely control the direction of oil prices in the near-term, there is a bit of disagreement among analysts over the bigger picture in regards to the trajectory of oil prices going forward.
So, let’s take a look at two different outlooks, one bearish and the other bullish.
The bearish case
Oil prices have fallen back from $80 per barrel, the direct result of the market recalibrating to the likelihood of higher OPEC+ production in the second half of the year. Indeed, the single largest factor that could push prices down going forward would be a sizable increase in OPEC+ supply.
However, OPEC and Russia are not the only factors at play. A few other factors could help keep a lid on oil prices over the next year or so.
The first thing that comes to mind is soaring U.S. shale supply. The U.S. has added somewhere around 800,000 bpd since the start of the year, a staggering sum. Infrastructure constraints in the Permian are real, but so far they have not slowed down output. The EIA sees the U.S. adding another 80,000 bpd in June from a month earlier. In 2018, the U.S. could average 10.8 mb/d, but it won’t stop there. The EIA sees production skyrocketing by 1 mb/d to an average of 11.8 mb/d next year.
The bottom line is that the International Energy Agency expects oil demand to grow by 1.4 mb/d this year, but non-OPEC supply (mostly U.S. shale) will grow by 2 mb/d. Next year, the story is the same: demand grows by another 1.4 mb/d, and non-OPEC supply will grow by 1.7 mb/d. These numbers suggest that the U.S. and a handful of other non-OPEC countries will more than meet global demand.
Those numbers by themselves are sobering. Once you add in another 1 mb/d of potential OPEC+ production, the market starts to look well-supplied through next year. “While geopolitical tensions and lingering risks of large supply disruptions remain an upside risk through 2H18, we think that prices will be corrected downwards towards end of the year and remain capped in 2019,” JP Morgan wrote in a note.
There are also some risks to demand, not least of which is the recent run up in prices (the IEA revised down its demand figure in May by 100,000 bpd because of higher prices). The possibility of an economic slowdown, possibly from emerging markets, could weigh on demand growth. The past few months has seen currency upheaval in Argentina, Turkey and Brazil, among other places. Argentina just sought an IMF bailout and Brazil was temporarily crippled by nationwide strikes, spurred on by high fuel prices.
The...