Easwaran Kanason

Co - founder of NrgEdge
Last Updated: October 9, 2017
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Business Trends
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Crude’s direction on a day-to-day basis has become harder to anticipate, as a growing mix of long and short-term factors influence sentiment and drive volatility. Brent has been in correction mode after breaching $59/barrel on September 25, but the downside has been limited. For those trying to gauge expectations on market rebalancing, the benchmark managing to hold on to the mid-50s on the way down is perhaps more significant than its failure to breach $60 on the way up. The new floor — which could be in the low-50s, as we believe it has not been fully tested yet — signals cautious optimism over supply and demand continuing to be balanced, going into 2018, as OPEC and non-OPEC producers prepare to pump less for longer and US shale looks ready to settle down after a red-hot pace of growth earlier in the year. Meanwhile, widening WTI discounts to Brent and Dubai are spurring US crude exports to new all-time highs. The trend is likely to get a fresh boost as India’s public sector refiners finally begin importing US crude, both conventional as well as tight oil from shale.

Brent continued correcting this week from a 26-month high of just over $59/barrel notched on September 25, as fears of Iraqi supply disruption owing to the Kurdish independence referendum receded fully into the background. The last rally proved resistance at the psychological ceiling of $60, but the North Sea benchmark

may have found a floor in the low-$50s, as market consensus has consolidated around a slow-motion rebalancing in progress.

A troika of factors underpins a more constructive view of fundamentals over the next 12-18 months:

- Growing confidence in the OPEC/non-OPEC cuts being maintained through the end of 2018, pushing aside concerns of an untimely flood of supply returning to the market. Optimism over the world’s two biggest oil producers Russia and Saudi Arabia remaining joined-up in their mission to restrain supplies received a boost this week from Saudi King Salman bin Abdulaziz’s high-powered maiden visit to Moscow.

- Moderating expectations of US production growth as shale producers appear to have reached the limits of productivity gains and face cost and shareholder pressures that are likely to curb aggressive new drilling. Taking into account the US Energy Information Administration’s somewhat divergent weekly and monthly production data so far this year as well as its forecasts, we are factoring in an annual output growth of around 400,000 b/d in 2017, tapering off in 2018 as long as crude prices remain in their current range.

- Cautious optimism over strong global economic growth supporting strong oil demand growth in 2017. The views on the quantum of increase vary and there is plenty of skepticism around the most optimistic 1.6 million b/d year-on-year jump predicted by the International Energy Agency. But few in the market would be willing to bet against it until and unless the upcoming monthly consumption data squash the narrative.

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