* The rebalancing of the oil market has likely been achieved, six months sooner than we had expected. The decline in excess inventories was fast-forwarded in late 2017 by stellar demand growth, high OPEC compliance, heavy maintenance
as well as collapsing Venezuela production.
* We expect many of these drivers to remain in place in 2018. The momentum of global growth and the rotation in its leadership to EM economies is leading us to raise our oil demand growth forecast even further above consensus expectations. In addition, we believe that the OPEC ramp-up in production will lag this normalization in inventories, requiring a shale supply response.
* As a result, we are raising our 3, 6 and 12-mo Brent oil price forecasts from $62.0/bbl to $75.0, $82.5 and $75.0/bbl, above current forwards. This forecast upgrade reflects a steeper level of backwardation - given a lower inventory path -as well as an expected increase in marginal costs - given higher activity levels and non-engineering cost inflation due to a weaker dollar and higher oil input prices.
* Greater backwardation will provide investors with even higher returns than implied by our price path and we forecast +24% petroleum total returns over the next 6 months. Inventories falling below average levels and the resulting greater
price impact of potential future disruptions will also lead to a rise in oil price volatility. While record high speculative positions may exacerbate this volatility, we find that these do not yet reflect the overweight allocation to commodities
that we recommend.
* Importantly, all the pillars of the New Oil Order remain intact in our view so this is a cyclical call. We expect that the shale response, OPEC’s eventual ramp-up and higher non-OPEC production will all bring prices lower sequentially with our 2020 Brent forecast at $60. The New Oil Order is on hiatus with its next point of reckoning likely a few years away.