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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Most Big Banks Are Now Bullish On Oil


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.

Related: Will Rising Crude Inventories End The Rally?

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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  • John Brown on February 05 2018 said:
    The big banks are wrong as usual, but then hope springs eternal. They are just a happy to manipulate the market us as OPEC/Russia and the rest of the industry. After all they still have big loans out there they need paid back, and future loans if the U.S. oil industry is booming, which it is with higher prices. OPEC/Russia have idled millions of BPD of production to try and balance the market, and while their is still a glut of oil on the market, its less than it was. Of course the U.S. shale oil industry has taken off and is rapidly adding more capacity, almost weekly with U.S. production back over 10 million BPD. But its comforting to go with the forecast rather than the history that U.S. production with WTI this week at $65 won't outstrip the forecast by a huge amount, but it likely will.
    This is a game that has been played many times, and we're going to play it again, but fortunately technology allows production to increase faster and get to market faster than ever before in history. There is no reason that a barrel of oil should be selling for more than $40 a barrel, but everybody wants it to be higher. They should have left it in the low to mid-50s, but greed and the psychology of greed always work the same way. It will be interesting to see how far all this across the board greed can push the price of oil with all that new production coming on board, and all that production idled. Sooner or later greed will push the price too high for too long, and then when everyone realizes we're floating in oil again panic will set it. Boom and bust, but the cycles are getting shorter folks, and this boom is an artificial boom created by idling capacity. So lets have fun and see how high this greed can push the price higher and for how long before reality kicks in and we have the crash.
  • John Burnet on February 05 2018 said:
    Excellent analysis - really appreciate Irana's work.
  • Timmie Tee on February 06 2018 said:
    The previous shale boom was driven by cheap money, but now we have a rising interest rate environment and the cheap shale plays have already been drilled, not to mention the increasingly high depletion rates. I predict U.S. shale will flatten out at about 5mpd, and not make a significant impact on $WTI.

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