BULL-BEAR: Oil Prices Quarter 1/2017
| Crude oil price (USD/Barrel) | 2015 | 2016 | 2017F | ||||||||||
| (Average) | Average | Q1 | Q2 | Q3 | Q4 | Average | Q1F | Q2F | Q3F | Q4F | Average | Max* | Min* |
| WTI | 49 | 33 | 46 | 45 | 49 | 43 | 50 | 53 | 52 | 55 | 53 | 60 | 49 |
| Brent | 52 | 35 | 46 | 46 | 50 | 44 | 52 | 54 | 53 | 57 | 54 | 61 | 50 |
Source: EIC analysis based on data from leading international sources (as of January 4, 2017)
| EIC’s view: Bear In the first quarter of 2017, crude prices are expected to edge up but remain at a low level due to excess supply in the market. Despite OPEC’s decision to cut its production quota, EIC does not expect that it will significantly slow global oil supply. Past experience suggests that both OPEC and Russia have exceeded their quotas, ignoring production agreements. However, if OPEC can actually lower production and push prices up, shale producers in the U.S., which have a break-even cost of USD55 per barrel, will reactivate and expand production and increase oil supply. All in all, the rebound in oil prices will thus be limited. |
| BULLs | BEARs | |
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• OPEC reached an agreement to cut production to 32.5 million barrels per day during its meeting in Vienna, Austria in November 2016. Starting from January 1, 2017, the cut will correspond to a decline of 1.2 million barrels per day for 6 months. On average, each member country will lower production by 4-5%, except for Libya and Nigeria, which are faced with domestic political turmoil and are now producing at a low level.
• Non-OPEC producers (Azerbaijan, Kazakhstan, Oman, Mexico and Russia) agreed to cut production by 0.6 million barrels per day. Russia will lead the cut, reducing its output by 0.3 million barrels per day during the first half of 2017. Russia is currently pumping a record high volume of 11.2 million barrels per day.
• The global economy is recovering and encouraging higher demand for oil. The IMF expects global economic growth to rise to 3.4% this year, up from 3.1% in 2016. Expanding economic activity, trade and investment will push up oil demand. The Energy Information Administration (EIA) estimates that global demand for oil will grow by 1.6% YOY to reach 97 million barrels per day. The largest contribution to growth will come from Asia, where demand will grow by 3.6% YOY. In particular, demand from China, the world’s second-largest oil consumer, will expand 4.2% YOY to reach 13.4 million barrels per day. |
• Supply of crude will remain slightly in excess of demand by around 0.42 million barrels per day in 2017, putting downward pressure on prices. The EIA forecasts higher supply at 97.4 million barrels per day, with demand rising to 97 million barrels per day. Around 57.2 million barrels per day of supply, or around 60% of global supply, will come from non- OPEC producers, up by 0.6% YOY.
• The U.S. rig count rose in December by 10% MOM, from 452 to 498. This reflects an upward trend in U.S. supply, consistent with the EIA forecast of 1.4% YOY growth for U.S. supply in 2017 (from 14.8 to 15 million barrels per day).
• President-elect Donald Trump supports development of oil businesses and will push policies to 1) expand oil extraction areas in federal land, 2) speed up the time needed to acquire a license for oil extraction in federal land, and 3) reform taxes on oil businesses such as by allowing tax deductions for intangible drilling costs (IDC). Such policies will incentivize oil exploration and production businesses to invest. As a result, costs will decline, supply from the U.S. will rise, and prices will subsequently fall. |