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Oil prices ended 2017 in positive territory, with WTI gaining more than 14% and Brent up over 19%. The oil market outlook now seems relatively stable, mainly thanks to OPEC’s decisions to cut production, but significant potential for uncertainty remains in 2018. Traders are now considering the main factors that will influence Oil prices in the coming year.
#1 Compliance of OPEC and non-OPEC Members Regarding Reduced Oil Production
Last November, total OPEC production fell for the fourth consecutive month. The rate of compliance with the deal to slash output was at 115%, the highest yet recorded. This is a positive sign that OPEC members and their allies remain very concerned about the overall state of the oil market and are actively committed to stabilizing prices. Many investors, however, are wondering how long this high compliance rate will last.
#2 OPEC’s Exit Strategy
OPEC’s decisions over the past twelve months have restored some stability to the oil market, and forecasts are more positive than they were a year ago. Output limits and strong cooperation between the major producers have reassured both analysts and traders, but a lack of information concerning the exit strategy is a key drawback for investors, and the eventual relaxation of the regime could trigger higher volatility if not managed properly.
#3 Global Oil Inventories&U.S. Shale Output Growth
An important factor for OPEC members regarding their exit strategy is the size of global oil inventories and stock surplus. The lower the surplus, the more likely it is that OPEC will abandon its production limits sooner rather than later.
Another issue offsetting the effect of reduced oil production is U.S. shale output, which continues to grow,creating significant uncertainty about the rebalancing of the Oil market in 2018.
Traders are also keenly aware of the potential for supply disruptions to catch the market by surprise, triggering strong and rapid upward movements. Interruptions in production could occur in troubles pots like Venezuela, Libya, Nigeria and other politically unstable countries. Unpredictable ’black swan’ events like earthquakes, wildfires, burst pipelines or spills could also affect the global oil industry.
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