Demand growth revisions
An extension to OPEC's production cut deal is certainly expected at the end of this month. This confidence, along with the current geopolitical environment, has kept ICE Brent trading firmly above US$60/bbl. However an outcome at the OPEC meeting which falls short of market expectations will likely lead to a sell-off and given the large speculative long in Brent, this could be fairly severe.
Last week saw a number of revisions to oil demand growth estimates. OPEC in their monthly report decided to revise higher its demand growth forecasts for both 2017 and 2018. The group now expects demand over 2018 to grow by 1.51MMbbls/d, 130Mbbls/d more than their previous forecasts They also revised higher their 2017 demand growth estimate by 74Mbbls/d to 1.53MMbbls/d.
However, the OPEC revision was followed the next day by the International Energy Agency (IEA), which decided to lower their demand growth estimates, mainly due to a mild start to winter, along with the impact of higher prices on demand. The agency revised lower demand growth for both 2017 and 2018 by 100Mbbls/d. They now expect global oil demand to total 97.7MMbbls/d in 2017 (+1.5MMbbls/d YoY) and 98.9MMbbls/d in 2018 (+1.3MMbbls/d YoY). The IEA also expects non-OPEC supply to increase by 1.4MMbbls/d in 2018, and combined with OPEC NGL production growth of c.0.1MMbbls/d, the oil market is likely to see a surplus of c.0.2MMbbls/d over 2018. This is assuming that OPEC keep production unchanged over 2018.
Global demand growth estimates for 2018 (MMbbls/d)
What will OPEC decide?
OPEC will be meeting in Vienna on 30 November, where the market is largely expecting members to agree on an extension to their current production cut deal through to the end of 2018. Despite positive signals, there are slight concerns that Russia, an ally to the deal, is less keen to commit to an extension right now. As reported by OPEC in its October report, nearly 178MMbbls of inventory overhang was removed from the market over the first nine months of 2017, leaving 159MMbbls more to bring inventories within the five-year average.
Saudi Arabia has already made it clear this target will not be met by the end of March 2018, which is when the deal is currently scheduled to expire.
In theory, OPEC should be in no rush to extend the deal.
There are still four months to go until the current agreement expires, and ICE Brent is trading firmly above US$60/bbl. As mentioned previously, media reports suggest this is the route the Russians would prefer to take. However, in practice, this strategy is unlikely to work. The market is expecting an extension, and so anything less than this could lead to a selloff. Furthermore, given that the speculative net long in ICE Brent is near record levels means a lack of action from OPEC could see significant speculative liquidation.
Speculators held a record net long in ICE Brent of 543,069 lots in early November 2017, and latest exchange data shows that they are still not far off from this level, holding a net long of 537,557 lots. We believe that OPEC will agree at their upcoming meeting to extend the deal until the end of 2018. Any action falling short of this would likely be seen as a bearish outcome.
New highs for US oil output
US crude oil output increased 25Mbbls/d WoW to 9.645MMbbls/d for the week ending 10 November 2017, surpassing the previous high of 9.61MMbbls/d made in June 2015. US crude oil production has increased 875Mbbls/d since the start of the year, and is likely to end the year at around 9.8MMbbls/d. It is true that the US oil rig count has fallen from the recent peak of 768 in August 2017 to 738 currently. However the number of wells completed in October still increased to 1,065, levels not seen since March 2015, when around 900 rigs were in operation.
Increased efficiency and the backlog of Drilled but Uncompleted Wells is likely to ensure that US oil production continues to rise in the near term. Meanwhile, there have been further disruptions in the US market over the week. The 600Mbbls/d Keystone pipeline connecting Alberta, Canada with the US was closed last Friday due to an oil leak. The pipeline closure has seen the Brent-WTI narrow, however with the pipeline scheduled to restart on the 23 November, disruptions will be limited.