In 2017, we expect the remaining moderate excess supply in the market to be completely eliminated despite higher supply from virtually all the major global producers. This is because the additional demand, expected to reach 1.3m b/d—near its long-term trend growth, should be enough to absorb all remaining and new supply. The completion of the rebalancing process should support higher oil prices, which we forecast to average USD55.0/b in 2017.
In the medium term, oil prices should be determined by the cost of the marginal producer, in this case US shale companies. Oil analysts currently estimate this cost to be USD60/b. We therefore expect a gradual convergence of oil prices to this level, leading to an average oil price of USD58.0/b in 2018.
In conclusion, while the shale revolution has been a game changer for oil, it has not changed its intrinsic nature as a market. When markets are over-supplied and prices fall, they tend to adjust through two channels. First, high-cost producers tend to exit the market as their businesses become unviable. Second, low prices encourage higher consumption which provide support to prices. These dynamics are currently underway in the oil market and are progressing in a manner that is faster than previously thought. This does not mean a return to a world in which oil prices exceeded USD100/b for several years, but a price of USD60/b is probably within range in the medium term.