Oil at the crossroads: Slow progress to market rebalancing – BMO CM

Earl Sweet, Head Economic Risk at BMO Capital Markets, notes that the oil prices have swung sharply over the past few months on gyrating expectations of a successful agreement among OPEC members, and possibly Russia, to restrain production.

Key Quotes

“West Texas Intermediate (WTI) had retreated from its mid-October peak of just over US$50/barrel to the vicinity of $43 during the second week of November, though it bounced last week on renewed enthusiasm about the deal’s prospects. Prior to that move, oil had been a notable laggard among industrial commodities in the post-election period. The rise in the U.S. dollar following the November 8th presidential election has not yet exerted a significant impact on pricing, though any further dollar increase stemming from market assessments of potential fiscal and trade policy shifts, or from an increase in rates by the Federal Reserve, would restrain oil prices.”

“Instead, the downdraft in pricing earlier this month reflected reduced expectations of meaningful restraint on production arising from OPEC’s crucial ministerial meeting in Vienna on November 30th.”

“Looking to 2017, we expect global economic growth to improve moderately, with firmer momentum in oil-thirsty emerging markets, as well as high-income nations. Combined with continued relatively low oil prices, this should boost global demand by 1.4 mmb/d (moderately faster than the current IEA projection of 1.2 mmb/d) to 97.7 mmb/d.”

“It’s possible that the November retreat in oil from the $50 mark may reinforce OPEC resolve in coming to a production-limiting agreement, particularly with the fiscal finances of many members, including Saudi Arabia, severely challenged by weak prices. However, given past experience with these types of agreements and the difficult issues to be resolved among OPEC members and with other large producers/exporters such as Russia, there is considerable risk of failure, which could lead to a sell-off. On the upside, an OPEC agreement to cap production somewhere in the range of 32.5-33.0 mmb/d, with evidence of adherence, could break prices convincingly above the $40-$50 range in which they’ve fluctuated since April. Given both upside and downside risks, we are maintaining our 2017 forecast for average WTI at $53/barrel.”