Oil Strategy Outlook 2018: The Battle for Balance

The fundamentals are improving drastically in the oil sector but the recovery is struggling to fully take hold.

Following several years of subdued oil pricing, the fundamental backdrop is improving drastically in the oil sector, but have prices recently overshot to the upside? Michael Tran, Global Energy Strategist at RBC Capital Markets, believes that the binary market sentiment is a result of an influx of ‘Tourist traders’: non-energy specialist investors with a herd mentality who can amplify oil price swings in either direction.

Introducing the Oil Market’s First Quintuple Threat

While oil producing nations were struggling, with many hanging on for survival, the US has, over recent years, undergone a complete transformation and emerged with an entirely revamped standing in the global oil market. The US shale oil phenomenon has structurally re-written how we think about the global oil trade, both domestically and on a global basis, but America is far from a one trick pony. Its elastic production, diverse crude quality, vast storage, integrated trading capabilities, and concentrated refining capacity all hold drastically different roles in the oil market today compared to prior to the downturn. The US has unintentionally become the world’s swing oil trading hub, a true quintuple threat never before witnessed.

The fundamental backdrop is improving but ‘Tourist Traders’ are having an outsized impact on oil prices.

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What to watch in 2018?

Furthermore, the oil market rebalancing act remains fragile. This ‘battle for balance’ is set in Asia, the region that will drive global demand growth in the years to come. To identify a leading indicator of a strengthening or weakening oil market, investors should monitor the physical crude pricing differentials in the Atlantic Basin (North Sea and West Africa). In normal circumstances, it is always the first place to fall into oversupply and the last one to rebalance.

Michael Tran discusses the outlook for the Oil sector in 2018 and the key developments that will impact the sector.

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