Global oil demand is growing at a healthy pace even as higher oil prices might be expected to rein in demand on the margin. Demand growth will be a little slower than last year, but still sufficient to soak up significant increases in non-OPEC crude oil supplies. If OPEC+ sticks to their production restraint, the market will remain tenuously balanced this year and keep a price-destabilizing inventory build at bay.
Make no mistake, absent a new supply disruption, non-OPEC supplies are on a path to rise significantly in 2018, led by U.S. shale. It is not surprising then that some market observers are warning that inventories will rise and knock the Brent curve into contango. This could encourage more stocking and weaker prices.
But, ESAI Energy is betting on demand and the expectation that OPEC+ will not abandon their production restraint in 2018. These two factors will keep the global market close to balance. That does not mean inventories will not build. They will, but mainly for seasonal reasons. All other things held equal, this should prevent a significant and sustainable price decline from the mid-$60s for Brent. Moreover, we share concerns over geopolitical threats to supply, which also discourage lower prices.