Rising US crude
The US is the newest swing producer6 on the block.It accounts for 16% of the total global output, but accounts for over 70% ofoil production growth. US production increased by 61.6% to 14.48mbpd inSeptember 2017, from 8.96mbpd in the corresponding period in 2011.This boom inproduction, dubbed the shale revolution, contributed to the global supply glut,and forced down the global price of the commodity.  

Developments in technology led to improved costefficiency in oil drilling and fracking, reducing costs and the price of WestTexas Intermediate (WTI).7 On the other hand, Brent Crude continues tostrengthen, driven by cut agreements and geopolitical tensions. This has led toa widening of the price spread, making WTI more price competitive. As ofJanuary 2nd, Brent traded at $66.96pb and WTI at $60.35pb, compared to theirprices of $56.82pb and $52.37pb in the corresponding period in 2017. Thisrepresents a 47% increase in the spread. 

On the quality side, WTI is lighter and sweeterthan Brent Crude and is thus more desirable for end users or refiners. For thisreason, in pre-2010, WTI was trading at a premium to Brent. However, the ArabSpring9 introduced supply uncertainties, flipping the premium discountsituation. During the period, Brent oil prices gained up to 30%. 

The increased competitiveness of US crude hasencouraged the shift in demand away from the Organization of the PetroleumExporting Countries (OPEC) to US crude. This, combined with the falling costsof US production per barrel, provides an incentive for US producers to increaseoutput, and boost market share.  This increase in US oil productionpresents a risk to oil prices. 

The Organization of PetroleumExporting Countries and its allies
The OPEC cartel supplies 40% of the world’sproduction, and represents 60% of global exports for oil. OPEC is a swingproducer in the market, led by de-facto leader- Saudi Arabia. However, with therise in US output, it appears that OPEC is losing its ability to sway themarket. Earlier in the year, in its April report, OPEC urged the US to reduceproduction levels and to increase market stability. Despite this, US crudeproduction continued to increase. In November 2016, OPEC together with 11non-OPEC oil producers, such as Russia, committed to make sizeable cuts to theiroil production and export levels. The timeline for this was originally June2017, but was extended to March 2018. At its last meeting for 2017 in November,OPEC and its allies agreed to further extend the deadline to December 2018.Compliance levels have been commendable, with its de facto leader, SaudiArabia, even cutting more than agreed levels. The market responded tocompliance levels within the cartel. The expected reduction in OPEC supply ispositive for oil prices. 

The unknowns
Unknown events can shake the oil market, but arealmost impossible to predict. Unexpected occurrences, such as natural disastersand security problems can lead to a force majeure10, limiting supply anddriving up prices. Geopolitical tensions between oil producers or betweenregions in an oil producing country can create supply concerns. For example,oil prices received a boost in October/November driven by market concerns overUS-Iran tensions and the Kurdistan war in the Middle East.  An unknownevent that affects supply will have an impact on prices.  Additionally,market expectations influence the direction of prices. If the marketanticipates a reduction in supply in the near term, demand will increase now,leading to higher oil prices.   



Price: Outlook
In 2017, oil prices gained 20.5% year-to-date.While we don’t expect oil prices to record similar gains in 2018, we expect theabove factors to introduce a floor to the oil market in the short run, causingoil prices to average higher this year. In 2018, oil prices will be supportedby improving economic conditions which boost demand, and OPEC production cuts,which will tighten market supply. Our forecast for the year’s average pricestands at $59.5pb, approximately 10.8% higher than 2017’s average. Risks tothis projection include US production, geopolitical tensions andslower-than-expected global growth.  



Provided domestic production levels remain stable,a higher oil price is positive for Nigeria. Increased oil revenue will supportbudget plans, reduce the need for borrowing, and boost fiscal spending. Anaverage price of $59pb is 25.5% higher than Nigeria’s 2018 budget benchmark of$47pb. This means more funds can be kept aside as savings. This will also leadto an accretion in the external reserves level and enhance the CBN’s ability tointervene in the exchange rate market.  

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