It may have felt like we were waiting for Godot, but OPEC has come to an agreement to curb production. That decision is set to cap the group’s total output at roughly 32.5 mn bbl/day–around 500K bbl/day lower than the average output reached in the second quarter of this year.
By our calculation using data from the IEA, that should see the crude market be in a deficit of between 0.5 to 1 mn bbl/day over the next year. Our base case had OPEC production increase slightly in the second half of the year, leaving the overall physical crude market in a slightly oversupplied position. Today’s news should accelerate the draw down in commercial inventories, which are elevated by historical standards. It will also likely mean that shale producers in the US will be called upon to meet demand growth, which is slated to register around 1.2 mn bbl/day over the next year–smomething we have already started seeing budding signs of with the slight upturn in US rig counts.
We continue to see a plateau for crude prices at the $60/bbl level, but today’s news suggests that we are likely to see that equilibrium reached a few quarters earlier, perhaps by the end of 2017.
We had been forecasting an average WTI price of $51/bbl in 2017, with this announcement likely to increase that by around $5/bbl.
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