- A ‘hard landing’ for China is the EIU’s central global forecast.
- The EIU has revised its oil price forecast for 2017 - 21 following to key changes to its underlying assumptions:
- First, we have revisited our supply forecasts in the wake of OPEC's agreement in September to cut production from its current level of about 33.3 million bpd to 32.5 - 33 million bpd. Second, we have downgraded our demand forecasts in 2018 in the light of the sharp economic slowdown that we expect to see in China in that year.
- We now expect a slightly quicker rebalancing of the oil market in 2017 as a result of lower OPEC output. Yet the deficit that we expect to see will prove insufficient for a prolonged price rally to take hold. The oil market will remain close to balance in 2018 - 21 as increases in consumption are matched by a rise in both OPEC and non-OPEC production.
The EIU expects the price of dated Brent Blend, the global benchmark, to trade at US$55 - 65/bbl for most of 2017 - 21.
This relatively narrow range does not mean the end of oil price volatility. We expect sharp downward lurches in prices in 2018 when growth in China slows sharply and in 2019 when the US falls into recession. Prices could move up rapidly in the case of unexpected supply disruptions or if market participants grow nervous about stubbornly low levels of investment in hydrocarbons.
However, we believe that average prices will remain close to US$60/bbl, reflecting a new equilibrium. Steady demand from emerging markets (which now consume more oil than the OECD) and producer restraint will help to put a floor under prices, and historically high stocks and nimble shale producers will prevent sustained price increases.
OPEC's announcement on 28 September that its members had agreed to cut oil production, the first such move in eight years, marked a turning-point for the organisation and, to a lesser extent, for global oil markets. After two years of growing fiscal austerity and weakening economic performance owing to falling oil prices, OPEC members have put aside their differences in an attempt to drive up prices. Assuming that the deal is finalised—crucial details are to be agreed at the cartel's next biannual meeting in late November—OPEC will probably succeed in preventing a renewed price fall in the short term and accelerating the rebalancing of the market. However, it is very unlikely to trigger a return to the sky-high prices seen at the start of the decade. Its proposed cut is too modest, and some cheating seems inevitable, as was seen in previous attempts at OPEC co-ordination. We now expect OPEC's crude production to average 33.2 million bpd in 2017, compared with our previous forecast of 33.6 million bpd. Furthermore, OPEC restraint will be offset by higher non-OPEC production. In particular, we expect Russia to continue increasing output, despite its apparent willingness to join OPEC's efforts. Russia has reneged on its commitment towards OPEC in the past, and its low-cost producers are intent on pumping as much oil as possible.
Significantly, if the initial price response to an OPEC cut in November is strong enough, this may prompt a quicker revival in US shale output. The gradual increase in the US oil rig count in July-September 2016 suggests that an increase in shale production could come sooner rather than later. We nonetheless continue to hold the view that prices will be on an upward trend in 2017 as the market moves to a small deficit. We forecast that dated Brent Blend will climb to an average of US$57/bbl in 2017 (previously US$54/bbl), from a revised estimate of US$45/bbl (previously US$44/bbl) in 2016. However, the rally will lose steam in 2018 as the OPEC deal unravels and Chinese consumption softens in line with an abrupt slowdown in industrial production and investment growth. China's slowdown will also have knock-on effects on other economies and weigh on sentiment globally. We forecast that Brent will average US$61/bbl (previously US$63/bbl) that year. It will fail to rise much higher in 2019 - 20 amid continued output growth from OPEC countries and, in 2019, a recession in the US. Prices will begin to edge up only in 2021, rising to US$64/bbl.
After a slowdown in 2015 - 16, primarily reflecting falling oil prices, the 2017 - 21 economic growth outlook for the Middle East and North Africa (MENA), which is dominated by oil exporters, looks slightly better. The main driver of this improvement is Iran (the second-biggest economy in the region), whose economy has been boosted by the removal of sanctions, with annual real GDP growth of 5.6% in 2017 - 21. We expect Iranian growth to be driven initially by higher crude oil exports, but over time this will increasingly be eclipsed by rising inward investment, notably into the country's infrastructure, which will provide a host of knock-on opportunities for the private sector.
Other energy exporters, meanwhile, will enjoy a partial reprieve in 2017 - 18, owing to slightly higher oil prices. Coupled with the positive impact of a concerted drive to upgrade these countries' business environments in 2015-16, this will push economic growth up. However, even with a likely small cut in OPEC oil production in 2017, the rise in oil prices will be insufficient to enable MENA oil exporters to reverse the spending cuts introduced in 2016. Persisting fiscal austerity and subdued public investment will weigh on private consumption and the non-oil economy's performance, thereby restricting GDP growth.
Chinese 'hard landing' is forecast
The effects of a sharp slowdown in China in 2018 will be felt around the world. The worst-hit economies will be those that depend on exporting commodities to China's industrial and construction sectors: Australia, Chile and Mongolia are at the forefront. Next will be countries that have deep and broad trading relationships with China, such as South Korea and Taiwan. The rest of the world will feel a chill through declines in equity prices and in consumer and business confidence.
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