4 hits & a miss from the IHS Markit oil market team

With the end of the year coming quickly, like our colleagues at OPIS, our team is also taking a break from holiday festivities for a look back.

Immediately after the November 2016 OPEC meeting, when the historic OPEC and non-OPEC supply cutting alliance was formed, IHS Markit made some key predictions for oil markets in 2017.

Now is the appropriate time to review the accuracy of those predictions, the key prediction was an average Dated Brent price of $54/bbl in 2017.

Not to pat them on the back too much, but for the most part, @IHSMarkitEnergy oil analysts were on point - with one notable misstep.

2017 Prediction #1:The OPEC/non-OPEC supply cut deal starting in January 2017 will tighten the oil market but not until 2Q/3Q.

OPEC and their non-OPEC alliance partners, principally Russia, surprised most oil market observers in 2017 with how effectively they delivered the promised 1.8 million bbl/day of supply cuts.

But IHS Markit was correct, in mid-June the oil price was still hovering in the mid $40s/bbl, it wasn't until late June, as the peak global demand season started, that the oil market tightened and prices started a sustained rise above $50/bbl and then above $60/bbl in November.

2017 Prediction #2:2016 would be the low point for upstream investment in this low price cycle.

This looks like being correct also. In the period 2012-14 upstream oil investment was around $700 billion per year, in 2016 this had dropped to $350 billion. IHS Markit made the call that this was the low point, project sanctions would start to slowly increase, as would upstream costs. Our current estimate is that upstream investment in 2017 will be around $380 billion, with most of the increase compared to 2016 being in US tight oil.

2017 Prediction #3:Oil demand would grow by more than 1.6 million bbl/day in 2017.

The hits just kept on coming, oil demand is expected to grow by 1.8 million bbl/day in 2017, marking the 3^rd consecutive year of oil demand growth above 1.5 million bbl/day.

We are currently in an exceptional period of oil demand growth. Oil demand is growing not only in the normal markets of China, India and the rest of Asia, but also in Europe and North America.

We expect oil demand to continue to grow at more than 1.5 million bbl/day both 2018 and 2019.

2017 Prediction #4:Average Dated Brent price in 2017 would be $54/bbl.

This is the big prediction, the forecast on which all oil analysts and forecasters are judged and once again it looks like IHS Markit nailed it.

With just a few trading days left in 2017 it looks like Dated Brent will average $54.50/bbl. Correct within 50¢, we'll take that!

2017 Prediction #5:US production would grow by 400,000 bbl/day from January to December 2017.

Well, you can't win them all!

Once again, as in the period 2010-14, US tight oil production growth has defied all expectations and observers in its ability to cut costs, improve efficiency and gain access to capital. The growth has been helped by the sharp rise in oil price in the second half of 2017.

It currently looks like US production will grow around 900,000 bbl/day from January to December 2017.

The key question for oil markets and OPEC is how much will US production grow in 2018? Is US tight oil capable of surpassing market expectations yet again?

Watch for additional IHS Markit analysis on these topics in 2018.

For next year's predictions, with a focus on the downstream oil market in 2018, reserve your copy of the OPIS 2018 Outlook Forecast.

You can also follow IHS Markit oil analysts on Twitter for real-time updates: @spencercwelch, @kevinbirn, @TomKloza and @Cinco70Denton. Or, follow our energy handles @ihsMarkitenergy and @opis.

Spencer Welch is Director, Oil Markets and Downstream in IHS Markit based in London.
Posted 20 December 2017

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.