Oil: Supply, demand and geopolitics all point to a positive year for bulls - TDS

TD Securities’ view on oil remains a bullish one for 2018, as they expect WTI prices to top the $60/bbl mark, with Brent heading toward $64/bbl.

Key Quotes

“On all fronts, the oil market is looking robust; demand growth looks to be firm globally and supply is in a position to tighten. With OPEC supply cut extensions set to be baked into the cake and lower than previously expected growth in US production looking likely, the recent jump in geopolitical risks should continue to lift prices throughout the year.” 

“Key to the 2018 outlook is the continued commitment to production cuts from OPEC and Russia. The current agreement is set to last until the end of Q1 but the cartel members are widely expected to extend this agreement for the whole of the year when they meet in Vienna on November 30th, 2017. On top of an extension to the current cuts, OPEC is likely to add further restraint on their exports and add export monitoring to their compliance measures. Saudis have already begun leading the way in this regard as exports to the US have hit their lowest level in recorded history in late October, and since July, exports to the US have been roughly 450k bpd lower than the first six months of the year on average. Continued commitment to these cuts and lower exports should do well to precipitate a large deficit and large draws in US inventories, which should send prices higher from here.”

“Furthermore, geopolitical tensions and risks in the Middle East and in Venezuela should continue to provide a risk premium for oil prices, as they present very real risks for major supply disruptions. The economic state of Venezuela has seen the government struggling to pay its debts, which they are now looking to restructure. This has meant that the oil revenues have been used to keep the country afloat rather than being used to improve infrastructure which has seen their production reduced, the quality of their crude criticized and shipments cancelled.” 

“The Middle East is also prone to disruptions, as demonstrated by the Kurdish-Iraqi conflict which put 600k bpd at risk. The recent Saudi turmoil represents another potential supply risk, should politics in the Kingdom unravel or tensions with Iran escalate. Also, the US relations with Iran have come under pressure, as President Trump did not certify the nuclear deal, leaving the possibility for the return of sanctions that crippled the Iranian oil industry just a few years ago.”

“The strong demand growth for oil and petroleum products sets a good base for the oil markets, especially in a time where supply is set to be well contained. This, along with potential geopolitical tensions, prompts us to project a reduction of the global inventory glut and the emergence of a deficit of at least 100k bpd in 2018, which should help send WTI crude prices above the $60/bbl mark.”