An independent view on the current and future state of the upstream oil & gas market

At the time of writing, oil prices are at their highest levels for over two years. Over the first nine months of 2017, it appears that the OPEC intervention of late-2016 has had the desired effect. Oil prices have generally stabilised in the $50-55/bbl region, while investor confidence has taken tentative steps towards recovery.

As we move into the last quarter of 2017, we expect little shift in macroeconomic conditions before 2018. However, we will be watching the OPEC meeting at the end of November with keen interest. Adherence to quotas, and the decision to extend cuts in OPEC’s 2018 production, is arguably the largest risk to the continued industry recovery going forward, certainly in the short-term.

Consensus Brent Oil Price Forecast 2010-2021 from the Upstream Investment Outlook 2017 Q3
Consensus Brent Oil Price Forecast 2010-2021 from the Upstream Investment Outlook 2017 Q3

The potential Saudi Aramco IPO has surely motivated Saudi Arabia to lead the way on production cuts and all eyes will on them post any IPO next year. Our analysis shows that, should the cut be extended by a further nine months to the end of 2018, the supply-demand picture is likely to remain balanced. However, should the cut be ended in Q1 2018, and a rapid resumption in OPEC production be seen, the market could easily tip back into oversupply, further suppressing oil prices and investment.

In the long-term, however, the fundamentals for recovery look strong. The lack of investment over 2014-2016 had weakened supply growth forecasts, to the point where it is likely that a significant wave of investment will be needed in the first half of the next decade. While the threats of fuel switching should not be understated, particularly with the emergence of viable electric vehicles and increasing battery and renewable energy source efficiency, the need for oil as part of everyday life is unlikely to be significantly eroded before 2030.