Global oil prices have recently hit a four-year high as looming sanctions on Iran and dwindling output from Venezuela tighten supplies of crude.
Crude fundamentals continue to look healthy despite OPEC's June decision to increase production by 600,000 barrels a day beginning in the third quarter of 2018. OPEC's cuts have largely served their purpose, with oil inventories having shrunk considerably in the past several quarters. We had always projected that OPEC and its partners would eventually turn the taps back on, given OPEC's lack of history sustaining longer-term production cuts.
Helping OPEC's efforts are geopolitical supply disruptions coupled with temporary Permian pipeline shortages. Venezuela remains in crisis, and its oil production has slumped further after an initial plunge in the fourth quarter of 2017.
US President Donald Trump's decision to abandon the Iran nuclear accord is likely to widen this year's crude oil supply-demand imbalance, accelerating the decline of global inventories and potentially leaving the market with fewer days of supply on hand by the end of 2018 than it has had at any point in the past eight years.
However, we believe the market continues to underestimate the capacity of the shale industry to eventually throw oil markets back into oversupply. US production reached a new high-water mark in June and should keep hitting new records, though that may come in fits and starts.
Crude prices have largely held above $65 per barrel for West Texas Intermediate (WTI) in 2018, which provides attractive economics for many US producers. Eventually, we expect pain for oil prices as growing US production serves as the primary weight to tip oil markets back into oversupply.
Our medium-term forecast for WTI is still $55 per barrel, against a current price of around $75. We think oil bulls are failing to recognise the potential for further productivity gains from US producers and are unduly worried about prime shale acreage running out more quickly than it really will.
Geopolitical disruptions have always been a feature of global oil markets, and such disruptions can have a lasting impact. The shortages faced this year by Venezuela and Iran may take months or even years to overcome. But neither affects our long-term outlook. We already believe that the growth trajectory of US shale will cause problems for oil markets eventually.