Previously bearish oil forecaster CBA no longer sees a sharp price drop this year

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  • The Commonwealth Bank, previously one of the most bearish forecasters on the outlook for crude oil, has abandoned its call for prices to fall heavily this year.
  • It now sees Brent crude averaging $65 a barrel this year, above the $53 level seen previously.
  • It points to improved cooperation among OPEC members and potential supply constraints in the US as the two main factors behind the call.

The Commonwealth Bank, previously one of the most bearish forecasters on the outlook for crude oil, has abandoned its call for prices to fall heavily this year, suggesting that over-compliance on supply cuts from OPEC members, along with the potential for supply constraints in the US shale industry, will see oil markets will “remain tight for the foreseeable future”.

“Over-compliance with production cuts by OPEC members, particularly Venezuela, are helping oil prices higher,” said Vivek Dhar, mining and energy commodities Analyst at the bank, pointing to the table below showing compliance among OPEC members to production cuts first introduced in 2016.

Source: Commonwealth Bank

“These countries account for around 70% of the total cuts agreed to by OPEC and their allies. February marked a record compliance level, with most members doing more than their share.”

Dhar says that over-compliance with the OPEC-led accord has helped reduce excess oil stockpiles held by OECD nations, and given the view that any surplus build this year is likely to be muted in his opinion, “deficit risks are now emerging”.

Source: Commonwealth Bank

Along with cooperation among OPEC and non-OPEC members to help balance the crude market, Dhar says production growth in the US shale industry — a major factor that has helped to cap crude prices this year — may start to run into infrastructure constraints by mid-year that could also cap supply.

“US supply, which is expected to account for over half of the growth in global production this year, faces potential constraints from infrastructure,” he says.

“The Permian basin is the largest shale oil basin in the US, and infrastructure constraints could start weighing on Permian supply growth from August.”

And with global demand growth expected to lift by between 1.5-2.0% this year, Dhar says that should keep Brent crude oil prices supported.

“We think it is likely that OPEC and allies will work together even after the pact to sideline supply expires at the end of 2018, and the balance of risks suggest that OPEC can maintain discipline and we expect the market to be kept in balance by OPEC,” he says.

“We now forecast Brent oil prices to average $65 a barrel in 2018, remaining range bound between $60-70.”

Previously, Dhar saw Brent crude finishing the year at $53 a barrel.

Source: Commonwealth Bank

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