Oil Price Fundamentals - Starting Off at a New Plateau

Oil has certainly been on a roll lately. An almost uncanny string of bullish events has pushed Brent up to the $70/bbl area - something that few anticipated a few months ago. The list of things that have gone the bulls' way is extensive: strong demand and the OPEC+ production cuts underpinned a surge to $60/bbl late last year, while the pricing-in and subsequent realization of an extension to the deal in tandem with a sharp decline in Venezuelan production, unexpected supply disruptions and, finally, the recent slump in the US dollar conspired to add another $10/bbl or so. But such bull runs cannot last forever; in fact there are some signs that this one is starting to peter out, as seasonal maintenance dampens demand. What is key is the extent to which demand then recovers in the "high" season. Extreme long positioning among hedge funds seems primed to trigger a correction, although the market's current backwardation will likely preclude a sharp selloff. But what's important is that any correction that does come about will be from a much higher level. Given the new market conditions, we see Brent averaging $65/bbl in 2018.