Crude oil: A black swan event for 2018? - Natixis
Crude oil has clearly been one of the major market movers in recent weeks (Donald Trump’s tweets fading into the background) and the sudden upturn in crude oil prices (which have surged by 37% since June), were it to continue, would have numerous consequences on the distribution of world growth and, especially, on inflation, according to analysts at Natixis.
“The balance sheet shrink, global liquidity and subsidence of volatility would be staring at a totally different scenario. Under these conditions, the OPEC meeting at the end of this month will be crucial. The market expects an extension of production quotas beyond March, but given current price levels, which are now far more comfortable for leading producers (OPEC, US and Russia), reaching a new agreement could be far more challenging.”
“The recent upturn in crude oil prices has been accompanied by stronger correlation between the GSCI Energy index and both US equities and the DXY dollar index, the trend having also been for renewed correlation of US high yield and US equities, in particular during bear phases.”
“This configuration is not without recalling Q1 2016, when the decline in crude oil prices weighed on the US high yield (energy stocks represent almost one fifth of the USD HY index). The big difference is that, this time, the outlook is rather more bullish for crude in coming quarters.”
“Our view is that the price rise seen through Q4 2017 has put geopolitical tension firmly back on the agenda. A symptom of a tightening market, the return of the geopolitical risk premium has led to Brent rallying to two year highs, trading in the $64/bbl-$65/bbl range during November.”
“Above all else, the current state of the market shows that OPEC’s sustained efforts to balance markets have had a tangible impact on supply this year. When combined with better-than-expected demand figures, the foundation provided by OPEC has been the springboard for higher prices. As we move into 2018, the most pressing issues in our view are as follows:
- Can high demand growth seen through 2017 be maintained at the current elevated levels?
- What will the response of US independents be to higher prices?
- With a wave of non-US non-OPEC producers due to hit the market next year, can prices remain at such elevated levels in 2018?”
“Although we see prices softening in the short term between Q4 2017 and Q1 2018, we are expecting a sustained rally through 2018, provided OPEC’s deal is extended and fully complied with. More light will be shed by the forthcoming OPEC meeting on 30 November.”
“At this juncture, we see Brent averaging $63/bbl in 2018 and $68/bbl in 2019.”