Bearish signs ahead for oil prices, but not too bearish

Societe Generale sees a near-term peak at about $65 per barrel, pointing to the potential for a U.S. recession.
By Daniel J. Graeber Follow @dan_graeber Contact the Author   |  Nov. 29, 2017 at 8:21 AM
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Nov. 29 (UPI) -- There are bearish signals ahead for oil prices in part due to declining inventories, though anything above $65 per barrel is unlikely, Societe Generale said.

"Due to significantly larger 2017 stockdraws than previously expected, the fundamental starting point for the 2018 outlook has become more bullish," Soc Gen said in an emailed research note.

Traders are watching economic trends, oil production in the United States and global crude oil inventory levels to gauge what happens next for oil prices. For balance, inventories for the major industrial economies of the Organization for Economic Cooperation and Development are down considerably from recent highs, but still 119 million barrels above 2010-14 average levels.

The draw on global crude oil inventories is supported by an effort led by the Organization of Petroleum Exporting Countries to drain the surplus with coordinated production cuts. Parties to the agreement meet Thursday in Vienna to consider its duration.

Soc Gen analysts said they expected OPEC to stand firm on production agreements, though actual output from member states could increase modestly. Total OPEC production next year is expected at 32.7 million barrels per day on average. That translates to an increase of about 300,000 barrels per day next year, compared with a cut of 400,000 barrels per day this year.

For non-OPEC production, analysts said most of the growth will come from North America. Combining U.S. shale oil output and recovery for Canadian oil sands, analysts Michael Wittner and Mark Kogel said total North American production could increase by 1.3 million barrels per day next year.

As parts of Canada show increased economic momentum, Soc Gen said costs for oil sand development are moving lower in some instances. U.S. shale oil, meanwhile, has been more resilient to lower crude oil prices than expected and countering the OPEC balancing effort somewhat.

Soc Gen said it was anticipating an average Brent crude oil price at $58 during first quarter 2018, with the range extending between $51 per barrel and $65 per barrel over the next 12 months. Brent was around $63 per barrel early Wednesday.

On the economy, Angel Gurria, the secretary general for the OECD, said there are some red lights flashing on the dashboards of many advanced economies. Starting in the next decade, Wittner and Kogel said they expected a global economic slowdown, driven in part by the United States.

"This is forecast to be significant enough to impact emerging economies, the key driver of oil demand," the Soc Gen report read. "As a result, oil demand growth and therefore oil prices will suffer."

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