Oil Price Fundamentals - Crossroad on a Bullish Highway

The oil market has been on a tear in 1H18. A spate of geopolitical tension has raised the specter of supply losses, which would deliver a stronger punch in what is now a tighter market. Meanwhile, the high season is just around the corner and inventories are expected to be drawn down heavily in 2H18, similar to what we saw in 2H17. Sentiment on the futures market has even remained upbeat despite some physical market weakness having appeared in May and the stronger dollar, both of which signal for a correction. IEA and OPEC data suggests that OPEC+ has already succeeded in rebalancing the market. What it all points toward is a possible market deficit. But whether this materializes will depend on OPEC, whose stated mission is "to ensure the stabilization of oil markets." And that is in fact where we meet the crossroad - if the status quo is left in place, oil is poised to skate right on through and could head to $100/bbl. But we expect OPEC+ to gradually wind down its production cuts in 4Q18. All things considered, it is difficult to see Brent averaging any less than $70/bbl in 2H18. Although this figure is admittedly conservative, we set it as our forecast for 2H18.