Over the last few months, oil prices have remained within a relatively narrow range between $45/bbl and $55/bbl. FSG believes that global oil prices will be driven by how strongly adherents to the OPEC-Russia production deal commit to agreed cuts, and how quickly US shale producers are able to fill the supply gap. These two factors will likely continue to offset each other and keep prices relatively balanced, with FSG forecasting an average price level of $52.5/bbl for WTI and $54.1/bbl for Brent in 2017. Over the last few months we have seen the following:
- OPEC appears to be achieving promised production cuts: The production cuts are designed to remove 2% of the global oil supply, or 1.8 million barrels a day. January production data suggest that OPEC members have complied with 90% of the agreed-upon production cuts while non-OPEC members have only met 50% of the required cuts. However, production cuts are difficult to monitor. Although some reduction in oil-tanker traffic out of the Middle East has been detected, the paucity and reliability of official data remains a key concern going forward
- US shale production is increasing significantly: Oil prices above $50/bbl, and rapidly increasing rig counts in onshore and offshore basis indicate that American oil producers are ready to maintain and scale up production, and are becoming increasingly optimistic about further investments in shale production. Output has increased by an estimated 400,000 bpd over the last six months, and further production increases remain likely
Risks to Monitor
While FSG believes that global oil prices are unlikely to shift course in the coming months, multinationals should be ready to respond to supply shocks that lift oil prices temporarily or drive increased price volatility. Several events could cause such a shock:
- Political instability in Venezuela that leads to an oil production disruption
- Conflict-driven supply disruptions in Libya, Nigeria or Gulf states
- A breakdown of US-Iran relations that imperil the Iran nuclear deal
To prepare for a price shock global companies should:
- Assess exposure to net oil exporters and net oil importers. Higher oil prices will provide economic relief for oil exporters while forcing net oil importers to tighten their belts
- Re-evaluate market portfolios by prioritizing resilient markets and closely analyzing commodity-dependent markets
For further information on the oil shock scenario, FSG clients can access the Events to Watch for 2017 report. For our latest updates and insights, FSG clients can visit the client portal. Not a client? Contact us to learn more.