Will politics, disruptions and the dollar continue to drive oil? – February 2018

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OPEC-Russia deal created a favorable backdrop The price of Brent fell 16% in the first half of 2017 but rallied 40% through the second half. The continuation of the OPEC-Russia deal plus steadily rising demand, created a favorable backdrop but it was the combination of several other factors which created the price catalyst.

But several other factors drove oil. US weather disruption and the rise in US oil exports contributed to the big drop in oil inventories in 2H17. The steady weakening of the US dollar also supported the rising oil price. Disruption in Venezuela and the threat of disruption in the Middle East, also contributed to oil price support.

Several scenarios possible for 2018. It is usually the combination of events and surprises that drive the oil price. The biggest issue is expected to be what happens to US oil output. The International Energy Agency (IEA) expects US output to reach 14.46 mbpd in 2Q18, an increase of 1.4 mbpd over that of 2Q17. This would account for most of the expected increase in global oil demand this year.

OPEC-Russia deal. Russia and OPEC have confirmed they will stick with the deal until year-end 2018 and may look for ways to further cooperate into next year. That will maintain the favorable backdrop for oil over the medium term at least.

Win-win for Russia. Despite complying with the OPEC agreement, Russia marginally increased oil output in 2017 over 2016.

Watching US market share. Russia’s oil producers have been reluctant supporters of the production deal. Their continued support may depend on whether US volumes grow, and take more market share, and any tax changes proposed by the Russian government.

Disruptions are possible. Other factors which may impact supply, and influence the oil price, will be the trend in output and exports from Venezuela, Libya and several other states with uncertain political or security situations. Traders will again pay close attention to these.

Dollar impact. Historically the US dollar strength has had a close correlation with the oil price and that should again be seen this year.

Demand. Demand growth, based on IMF forecasts for global growth, should remain strong in the 2018-20 period. The expected big switch to electric engines, which will have a big negative impact on oil usage, seems to be delayed further into the next decade.

Russia economic preview. The oil-price scenarios outlined in this report are used in the Russia economic models. Detailed forecasts and the implications for the budget, economy and the ruble will be set out in the Preview 2018-20 Economy report.