Ascent of oil prices – commodity market trend & outlook Q1 2017

Prices for most industrial commodities worldwide continued to rise in the fourth quarter of 2016 from their lows in early 2016. Crude oil prices are forecast to rise to $55 per barrel in 2017 from $43/bbl in 2016 following agreements among some Organization of the Petroleum Exporting Countries (OPEC) producers and non-OPEC producers to limit output in the first half of 2017. This has been established in the recent World Bank Commodity Market Outlook report for Q1 2017.

The Commodity Markets Outlook is published quarterly by the World Bank every year, in the third week of January, April, July, and October. The next issue will be out 18 April 2017. The report provides detailed market analysis for major commodity groups, including crude oil. Data on trends and the outlook for crude oil and other commodities based on market analysis can be accessed in the report available at Commodity Markets Outlook, January 2017 or download it here

For a quick review of the main findings read below.

Trend in oil prices

Crude oil prices jumped 10 percent in the fourth quarter of 2016, averaging $49.1/bbl, following agreements by both OPEC and non-OPEC producers to reduce output by nearly 1.8 million barrels per day in the first half of 2017. By the end of January 2017, the decrease to 1.5 million barrels per day was achieved. The oil market continues to rebalance during a steady demand growth, while sharply lower investment in non-OPEC countries has led to lower production levels, notably in the U.S shale oil sector. Global stocks, however, remain stubbornly high, particularly in the United States, and were a main reason for oil producers to limit production.

The overall production reduction of crude oil is intended to push oil prices up. Due to the crude oil over-supply caused by the US production of shale oil, prices plummeted from $115 per barrel to $27 per barrel a year ago.

Oilprice.com one of the most popular energy news site in the world, confirms growing shale oil production is the cause of serious worry in the OPEC countries as it has become the main undermining factor in the OPEC cartel’s efforts to boost crude oil prices to a level that encourages new investments in future production.

Projected outlook and risks: short term

OPEC sources revealed that Saudi Arabia and other big oil producers from the Gulf are hoping to achieve prices of $60 per barrel, believing that this price level would motivate new investments while discouraging the shale industry from an output expansion. (Source: Reuters)

Considering the current face of facts in the market there is a case to be made for this expectation: as shale oil producers have been drilling rigs for the past two months and seem to have no intention of containing their output growth.

According to the Commodity Market Outlook report for Q1 2017, oil prices are projected to average
$55/bbl in 2017, as estimated in the October 2016 forecast,an increase of 29 percent from the 2016 average oil price. This increase largely reflects partial compliance with the recent agreement between OPEC and non-OPEC producers. Moreover, the market is expected to tighten in 2017, particularly in the second half of the year, which would help reduce the excess stock. Onshore U.S. lower-48 states oil production (including shale) is projected to bottom out in the second quarter of 2017 and rise moderately thereafter. Therefore prices are projected to increase to $60/bbl in 2018. That is assuming a balanced market and no additional OPEC supply restraint.

Projected outlook and risks: long term 2020 – 2040

By 2020, the average price of a barrel of Brent crude oil is expected to rise to $79/b and shale oil production will slow after 2021. This will contribute to a decline in total U.S. oil production through 2040.

By 2040, oil demand worldwide will start driving oil prices to $136.21/b consequently exhausting the cheap sources of oil, making it more expensive to extract oil. (Sources: The Balance Oil price forecast 2017 – 2040 l Annual Energy Outlook, September 15, 2016).

These forecasts all depend on 1). what happens with U.S. shale oil production, 2). how OPEC responds, and 3). how fast the global economy grows. Considering that these factors are all so uncertain the EIA (Energy Information Administration) is unable to set a hard forecast for the period after 2020.

Strong demand and the recent agreement among OPEC countries along with some key non-OPEC oil producers are putting upward pressure on crude oil prices. However, forecast increases in global production should provide downward pressure on prices and mitigate the potential for significant crude oil price increases through 2018. Despite the recent OPEC agreement, EIA expects global petroleum and other liquid inventory builds to continue, but at a slowing rate, in 2017 and 2018.

(Sources:World Bank Group. Commodity Markets Outlook, January 2017. World Bank, Washington, DC. Energy Information Administration BT&P publication period: 2017 )