Oil: Prices have recovered from June lows but how high can they go? - NAB

Global oil prices strengthened greatly since their recent nadir in mid-2017 and brent has gone from mid-40s in June to exceeding $60/bbl of late – a more than 35% rally, points out the research team at NAB.

Key Quotes

“Brent has found support from two major factors: OPEC cuts and geopolitical risks in Iraq. OPEC-Russia cuts have been slow to support prices, but it appears that they are finally taking hold, with inventories now lower and prices rising. Recent comments from Saudi Arabia’s Crown Prince Mohammad bin Salman point to Saudi support for agreed cuts to continue until at least late 2018. The cuts were to expire next March. Russian President Vladimir Putin has also expressed support for continued cuts.”

“The recent conflict between Iraqi and Kurdish forces in northern Iraqi oil hub Kirkuk has caused some concerns. However, with most Iraqi production concentrated in the south of the country the implications for oil market fundamentals are relatively small.” 

“WTI has also gained, although at a much slower rate than Brent. Indeed, the Brent-WTI spread hit its highest level since 2015 in September and looks set to remain elevated. While US shale production growth looks to be proceeding at a more subdued rate, ultimately favourable global prices are likely to see the tap turn on further. We see this as something of a brake on a continued price rally. Ultimately, we forecast Brent to trade in the 60s throughout 2018, starting the year around $60/bbl and rising to mid-60s by Q4.” 

“Higher fuel prices, combined with our expectations for a lower Australian dollar, are likely to lead to higher fuel prices for Australian motorists. The September quarter saw petrol average 123.3AUc/l, but we see petrol in the December quarter around 3.9% higher at 128.1AUc/l. Our forecasts point to petrol being above 130AUc/l for most of 2018.”