This time last year, all the big banks that OPEC and Russia took by surprise a month earlier by agreeing to an oil production cut were wondering just how long the agreement would last. The overwhelming opinion was one of skepticism. The deal would break apart in a few months, analysts said, or producers would cheat as is their habit. Alternatively, some argued, U.S. shale would grow so quickly that it would offset whatever cuts OPEC, Russia, and their partners manage to deliver.
Fast forward a year, and these same banks are changing their tune as a new reality sets in: now they are scrambling over each other to issue bullish price forecasts on crude oil. Goldman Sachs was the latest to give up its skepticism and predict that Brent would reach $80 a barrel within six months. A couple of days earlier, JP Morgan had said that it expected the international benchmark to hit $78 in a few months.
In mid-January, BofA upped its price forecast on Brent to $64 a barrel, which now doesn’t look bullish enough, compared with what Goldman and JP Morgan expect. Morgan Stanley falls in the middle, predicting that Brent will occasionally touch $70–75 in the first half of this year, stabilizing around $75 a barrel in the third quarter.
These revisions were prompted by the banks’ perhaps unwilling acceptance of reality: OPEC and Russia did the unthinkable — they managed to bring down global inventories enough to push prices up. Bloomberg’s Grant Smith details in a recent story all the ways in which OPEC proved the banks wrong, from doubts a deal would be reached at all, to the surprise of Russia’s joining the group, to the overcompliance that the cartel reached with the cuts in late 2017.
In all fairness, these doubts were justified. Iraq, for one, never reached its production quota, so Saudi Arabia had to step in and cut more deeply than it had agreed to in order to make the deal work. Venezuela’s production fell to the lowest in three decades last year, but not because it wanted it to. The decline was a natural consequence of years of mismanagement, underinvestment, and U.S. sanctions.
Also, prices were supported by production outages in Libya and Nigeria, and in late 2017, by the suspension of the Forties pipeline in the UK North Sea, as well as by growing optimism about the global economy and crude oil demand.
That shale did not offset the cuts, amounting to a total 1.8 million bpd, is also true and goes counter to what most analysts had originally expected. But these expectations were rather bullish to begin with. EIA data shows that over the 12 months from January 27 2017 to January 26 2018, U.S. crude oil production rose by 1 million bpd. That was only to be reasonably expected, since a year ago shale producers were still reeling from the blow they had suffered from the 2014 price collapse. They were also more cautious after the collapse, wary of boosting production too much too quickly.
So, the banks were wrong. OPEC proved them wrong, and it probably stings a little. One would think this would have them more cautious with their expectations, but the banks are now touting rosy forecasts, but this could come back to haunt them. Warnings are emerging that the higher oil prices could steer the global economy off course and dampen demand. Also, there is the issue of record-high bullish positions on crude and oil products. Such situations usually result in a correction, and that correction could be a big one, although its effect will likely be temporary.
By Irina Slav for Oilprice.com
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