Oil rally could continue into 2018 if OPEC extends output deal

Oil will likely rally into 2018 with periods of volatility as an anticipated extension of OPEC-led output restrictions offsets higher US production, a Reuters poll showed last week.

Analysts raised their crude price projections, the survey showed, as expectations of an output cut extension were buoyed by comments from officials in Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries.

“Rumours of extension, expansion or erosion (of the OPEC supply deal) could all impact prices and markets will be closely watching any statements from the upcoming meeting,” said Ashley Petersen of Stratas Advisors.

“Assuming, as we do, that the deal is extended through 2018, then actual levels of compliance will be a big factor in rebalancing through next year,” she said.

OPEC compliance stands above a high 80 per cent currently.

OPEC’s next meeting is in November, where the group and other producers including Russia are expected to prolong the output cuts of about 1.8 million barrels per day (bpd) beyond the current deadline at the end of March 2018.

The survey of 35 analysts predicted Brent would average $53.25 per barrel in 2017, up from last month’s $52.60 forecast. Brent crude futures have gained about 17 per cent over the past two months and has averaged $53 this year.

Brent was forecast to average $55.71 in 2018, the poll showed.

The prospect of US sanctions being reimposed on Iran and tensions in Iraq where the northern Kurdish region has been pushing for independence helped push up prices, analysts said.

“There is a real risk of some sanctions being (re)imposed on Iran,” said Abhishek Kumar, energy analyst at Interfax Energy’s Global Gas Analytics in London.

But some analysts said new sanctions would not lead to a substantial curbing of Iranian exports because Europe and Russia were unlikely to back them.

The poll forecast US light crude would average $50.21 barrel in 2017 and $52.50 in 2018.

SOLID DEMAND GROWTH

Analysts expect oil demand growth for the remainder of 2017 and in 2018 to average about 1.5 million to 1.7 million barrels per day, mainly driven by Asian nations such as China and India.

A rise in oil prices could encourage higher U.S. shale output, which has widened the gap between WTI and Brent futures.

The premium of Brent to U.S. light crude has grown to its widest since August 2015, at about $7 a barrel, so U.S. crude can compete more effectively in Europe and Asia.

U.S. exports have hit record highs this year and this trend is expected to continue.

“U.S. crude exports will likely continue to grow over the next years and Asia is the hottest battleground for market share. We expect U.S. crude flows toward Asia will expand,” said Daniela Corsini, commodity market economist at Intesa Sanpaolo in Milan.

“Middle Eastern producers, especially Saudi Arabia, will respond by strengthening economic and political ties with the main Asian consumers,” she said.