The global oil market has undergone a fundamental shift in recent years due to the development of economic tight oil production in the US. The surge of US production, coupled with stagnant global demand growth, drove Brent crude prices down from over $100 per barrel in 2014 to less than $30 in January 2016. In response, OPEC-Russia agreed to production cuts in November 2016, which were extended to the end of 2018 in June-2017. The cuts, when combined with robust global demand growth and speculative money flows, pushed Brent to $70/bbl in mid-January 2018.
So what’s next?
Due to short development times of ~6 months, US oil production is incredibly price reactive when compared to conventional production. There are worries that a surge in production from the US, incentivized by the higher prices through Q4-17 and early 2018, could derail the price recovery and crash the market once again. However, synchronised economic growth across both developed and developing economies will lead to another year of robust oil demand growth in 2018. We therefore see Brent trading in a $60-$70 range this year, as US shale oil caps to the upside and demand provides a floor. Looking ahead to 2019, supply-demand balances look increasingly tight; US shale will shift from villain to hero as the market increasingly turns to US production growth to meet incremental demand growth, due to a lack of new supply in other non-OPEC countries.