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The oil market in 2018: What could go wrong?

In January 2014, Makkah newspaper published its first issue, which carried an article under the title “Who is the happiest Saudi minister in 2014?” The editors chose Oil Minister Ali Al-Naimi.
The selection wasn’t random. The paper listed five reasons behind its choice, including forecasts that oil prices were expected to stay above $100 per barrel. Another factor was the expectation that the Organization of the Petroleum Exporting Countries (OPEC) need not take major action, as the stable market of 2013 was expected to continue.
Unfortunately, 2014 turned out to be one of the most disruptive in the history of oil market.
Forecasting is not an easy game, given the possibility of oil demand or supply swinging up or down at any moment. And 2014 is certainly a good example of that.
If OPEC is good at something, it is the ability to sometimes ignore signs or abandon common sense and logic. This is because there are always rifts between those who want higher oil prices (the hawks) and those who want reasonable prices (the doves). 
The hawks always focus on short-term gains. The doves try to reason with them, but sometimes compromises are made. That is what happened between early 2011 and mid-2014, when OPEC enjoyed higher oil prices but neglected all the negative effects of that on the demand and supply balance.
With oil prices above $100, producers were encouraged to search for oil; even New Zealand wanted to put out blocks for exploration. But the real danger was from the US, where an unregulated market allowed producers to dump crude as they wished, leading to an oil glut.
Demand was also affected by the high prices.  In January 2014, OPEC forecasted demand to grow by 1 million barrels a day (bpd) that year, while it expected non-OPEC supply to grow by 1.3 million bpd.
By December, OPEC had changed its forecasts significantly. It revised demand growth down to 930,000 bpd and non-OPEC supply upward to 1.72 million bpd. Saudi Arabia had more conservative demand-growth figures of 700,000 bpd.
In January 2014 no one imagined that the oil market would see prices falling by $30 to $40 in the second half of the year. As for non-OPEC supply growth, the signs were there but OPEC neglected them, and downplayed the effects of US shale oil on the market.
Back to the future, OPEC and its allies in the output-cuts agreement are entering 2018 with a lot of optimism, with many OPEC ministers expecting the market to rebalance. However, there are still a few things that can go wrong.
First, some members of the output-cuts deal could lower their level of compliance as oil prices strengthen. Brent crude prices went above $65 on Dec. 12, the highest since June 2015; with high oil prices there is a possibility that some producers might be encouraged to lift their production. 
Second, although the prospect for shale oil growth is still unclear, there could be an unexpected increase in output as oil prices keep rising. Most forecasts point to growth of between 800,000 and 1.2 million bpd. The lowest forecast in the industry so far is from OPEC, which puts it at under 800,000 bpd. However, many oil companies in the US, including Chevron, have already announced increases in capital spending to develop shale next year — and that may result in higher output. Evercore ISI consulting expects capital spending on US shale production to increase by 20 percent in 2018.
Another thing that could go wrong next year is that low oil supply from OPEC might lead to a tight market that will push prices higher. That might sound like good news but it is not. It is not wise to push the oil market into deficit or for producers to be unable to meet the rise in demand. This will encourage cheating by those in the agreement or tempt other producers outside the agreement to raise production.
Finally, the situation for the crude oil and products inventory in the OECD may change next year to a less favorable level. While OECD crude-oil inventories are now much lower than they were at the beginning of the year — around 140 million barrels above the five-year average — this could go up in 2018. One reason for that is the change in the base years for calculating the five-year average, which might result in an increase in the overall numbers. Also, product stockpiles in the US increased lately. If this trend continues it will pressure prices as it may lead to less crude processing in coming months until the overhang clears.
Despite today’s optimism about the market rebalancing, it is good for OPEC to keep its eyes open — while it may expect the best, it should plan for the worst.
• Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi