JP Morgan predicts the OPEC cutback initiative will collapse by year's end.
Analysts have tried to offset on-going reports of rising stockpiles and production around the globe by stating that a market rebalance will still occur later this year - but that hope seems virtually extinguished with news of a pricing structure that has re-emerged and indicates the glut will endure into next year.
BloombergMarkets reports that contango, whereby oil prices for immediate delivery are lower than forward contracts, has arrived just days after banks warned of a grim outlook for 2018 due to strong U.S. shale growth and recovering output from Nigeria and Libya, to name just three sources.
Amrita Sen, chief oil market analyst at consultants Energy Aspects Ltd., said, "Brent spreads are getting clobbered; the Atlantic Basin is awash in light crudes from Nigeria and Libya."
We assume that the OPEC/non-OPEC deal collapses at the end of 2017
Earlier last week trading volumes in the spread reached a record high, of the equivalent of 65 million barrels for Brent and 41 million for West Texas Intermediate, causing Tamas Varga, analyst for PVM Oil Associates Ltd. to state the obvious: "The sentiment is bearish."
As for 2018's outlook, Martijn Rats, oil strategist at Morgan Stanley, describes it as "troublesome" because U.S. crude production is expected to average a record of more than 10 million barrels per day.
Given the circumstances working against the market, JP Morgan's global commodity research team is warning that prices are going to weaken once again and has taken $10 and $11 off the average Brent and WTI prices respectively for next year.
David Martin, executive director at JP Morgan, added, "As we have previously flagged, the longer-term consequences of OPEC's actions will likely prove unpleasant for the cartel's members.
"We assume that the OPEC/non-OPEC deal collapses at the end of 2017, as cheating becomes untenable for core OPEC members; consequently, the 2018 oil market balance now points to rapid builds in inventories which, absent continued OPEC support, should depress oil prices."
Martin agrees with Morgan Stanley that 2018 will be a troublesome year: "U.S. rig activity may continue to rise for the early part of next year and therefore the production impacts on U.S. shale are assumed to really start from mid-2018 onwards", thereby crushing "the prospects of higher prices next year."
In the long term, Martin believes U.S. shale and OPEC can survive when demand is strong and where mature field decline in conventional production is accelerating: "Arguably, oil prices will need to accelerate this process, but in doing so a return to sub $40 per barrel may yet be unavoidable."
As for the near term, Matt Smith, head of commodity research for ClipperData, earlier this week predicted "Probably we'll go a bit lower from here, to $44 maybe," but he stressed that "There's limited downside from here" due to demand coming through.