Oil: no sign of tighter market

Macro outlook

Implementation of the agreement between 11 members of OPEC and 11 oil producing

countries outside OPEC from last year to reduce oil production by around 1.8mb/d in the
first half of 2017 looks to be well underway. There have been some concerns about lack of
full compliance and OPEC has also voiced reluctance to extend output cuts in the second
half of the year. Market conditions do not look to have tightened substantially on the back
of the output reduction. Hence, US crude stocks are still at a high level and have actually
risen this year in seasonally adjusted terms. Furthermore, data for US oil rig counts,

estimates for actual crude production and supply projections from official forecast agencies
suggest that US crude production is starting to recover. Oil demand has found support from
a weaker USD this year and macroeconomic key figures suggest that the world economy
has gotten off to a good start in 2017. Looking ahead we look for world crude supply to
return to more normal levels following a couple years of excessive production. Demand
should be a little stronger this year due to a weaker USD and slightly higher global
economic growth.

Price outlook

We have maintained our forecasts from the December commodities market guide as both

actual price and the outlook for oil market fundamental factors are about in line with the
assumptions we made then. Hence, we forecast that the price of Brent crude will average
USD56/bl in 2017 and USD61/bl in 2018. This would imply prices for jet fuel of
USD530/MT and USD589/MT respectively, prices for ULSD (ultra-low sulphur diesel) of
USD495/MT and USD548/MT respectively, prices for 0.1% gasoil of USD489/MT and
USD539/MT, respectively, and prices for 3.5% fuel oil of USD310/MT and USD325/MT,
respectively. We have only made minor adjustments to product prices reflecting slight
adjustments to the expected crack spreads.

The biggest risks to our forecasts are sudden changes to crude production in Nigeria. That
is a somewhat symmetrical risk factor, since there is room for production either to recover
back to full capacity (which would add around 700kb/d to the market) or to fall further if
internal rebels target more oil fields (Nigeria is currently producing around 1.5mb/d). On
the demand side, financial markets in general, including the oil market, are still waiting for
details on US President Donald Trump’s plans on fiscal policy, trade policy, financial
regulation etc. The market is probably already pricing in some positive effects on oil prices
from more expansionary fiscal policy, i.e. there is probably greater room for the market to
be disappointed on this parameter.

Hedging recommendation

Overall, we have a slightly more positive assessment on the outlook for oil prices in 2017
than the forward market and in general a more positive assessment of 2018. This probably
reflects a more bearish view on the USD and higher global economic growth expectations.
Given the current pricing in the forward market, we recommend consumers hedge exposure
in Q4 17 and 2018.

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