Will crude oil prices moderate?

After declining in the first half of 2017, crude oil prices have taken off pretty well since mid-June due to multiple favourable factors. The production discipline of both, Organization of Petroleum Exporting Countries (Opec) and non-Opec nations, led to global inventories declining through 2017. This coupled with disruption in US crude oil production due to Cyclone Harvey in August and geopolitical issues in West Asia have contributed to a significant rise in crude oil prices during the second half of 2017. Brent crude, which saw a low of $44.2 a barrel on June 22, is now trading above $60 a barrel consistently since November. At $63.8 a barrel currently, it is not far from its three-year high of $66.4.

The key question is how will crude oil prices move in 2018. While some experts predict prices could move to the $70-75 a barrel range, as global economic growth picks up, others believe prices could moderate from here on. Kotak Institutional Equities, for instance, expects an increase in global oil inventories during the first half of 2018, compared to consistently reduction through 2017, leading to a moderation in Dated Brent crude price from the current levels. Dated Brent is a critical component of Brent complex. The recent disruption from the closure of the Forties pipeline (largest source of North Sea crude supplies used for Dated Brent benchmark) is expected to normalise in the coming week. On the other hand, experts also say at higher levels some capacities (currently uneconomical) would also turn viable, leading to excess supplies. They also argue underlying demand isn't strong as yet.

Referring to the International Energy Agency’s (IEA’s) latest forecast, the Kotak analysts say call on Opec supply is to remain at 32.5 million barrels or MB/day for 2018, closer to the current levels of production. In comparison, non-Opec supply is expected to increase by 1.6 MB/day in 2018, compared to 0.6 MB/day in 2017. 

On demand, experts predict it to increase between $1.3 and $1.5 million barrels a day in 2018. Clearly, the views are divided and the jury is out on this.

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