(MENAFN- Gulf Times) Brent, the benchmark for more than half the world's oil, is up about 12% higher this year after surging 52% last year.
Opec and its allies outside the group agreed on November 30 to maintain oil production cuts until the end of 2018. The decision showed the strength of the alliance with Russia. By keeping the 1.8mn bpd of cuts in place for a further nine months, the oil producers aim to return stockpiles to their five-year average without overheating the market and eliciting a new flood of shale oil.
But the oil market visions for 2018 are as bewildering as they can get.
The Organisation of Petroleum Exporting Countries (Opec) thinks production curbs will finally eliminate the excess oil inventories that have depressed prices for more than three years. But in the view of the International Energy Agency, which advises consumers, that surplus will barely budge.
Opec predicts the re-balancing will be complete by late next year as those stockpiles plunge by about 130mn barrels in 2018. By contrast, the IEA sees inventories remaining steady as new supply growth surpasses gains in demand.
At the heart of the clash between the 2018 forecasts is whether the alliance can deplete the rest of the overhang without triggering a new flood of shale.
The forecasts are further problematised by what big banks have to say.
Goldman Sachs Group, one of the most bullish, has boosted its outlook for the Brent by almost 7% to $62 a barrel, citing stronger-than-expected commitment from Opec and partners. That compares with an average price of about $54 this year. JPMorgan Chase & Co says 'solid fundamentals and tightening balances, as well as Opec's willingness to balance markets, are reasons for its positive outlook.
But on the other end is Citigroup, which says there's a risk the current bullish supply and demand dynamic will run out of steam, and an upsurge in US shale production could spook the market. For Barclays, price gains will encourage the US and other non-Opec producers to boost output in 2018.
To add to the confusion, oil traders are increasingly betting that the Brent will climb to $80 a barrel from the middle of next year amid output cuts and simmering geopolitical tensions. In fact, the pattern has been evolving for several weeks and throughout November, volumes on Brent $80, $90 and $100 calls for 2018 and 2019 surged to the extent that the most-held December 2018 contract was the $100 call.
With Opec committing to extend the output cuts through 2018, oil bulls argue that shrinking inventories mean that any supply disruptions may provoke sharp price gains.
True, few analysts realistically expect oil prices to return to the erstwhile $100-plus levels in the near future. But oil companies say global energy future envisages rising demand and population growth, making oil an important fuel for decades to come. Despite the emergence of renewables, global energy security depends mainly on fossil fuels for the foreseeable future.
The world is in need of a stable oil market with price equilibrium.
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