Benchmark crude oil prices will likely average $54 a barrel in the first quarter, but the rally may stall if producers don't deliver on pledged supply cuts, a CNBC survey of strategists and forecasters showed.
OPEC agreed in November to cut production for the first time since 2008, defying sceptics. The cuts totaling about 1.2 million barrels a day aim to accelerate the global oil market re-balancing process.
Though the supply curbs are effective from January 1st, compliance rates will only become clearer in February. Oil bulls are betting OPEC will stick to the script. Consultancy Energy Aspects expects compliance rates of around 80 percent but getting Iraq to adhere to the quota will be challenging. Oil bears, however, believe speculating on the final outcome is premature.
"The recent rally in oil prices above $50 rests more on faith than fact: no hard data on compliance around pledged supply cuts by OPEC and non-OPEC countries will emerge until February" said Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas, who expects Brent crude to average $47 in the first quarter.
Brent crude will likely average $53.83 a barrel in the first three months of 2017, according to the poll of 30 strategists, traders and economists. Respondents' price forecasts ranged from as low as $46 to as high as $65 a barrel.
The benchmark for two-thirds' of the world's oil, Brent crude, averaged $51.06 in the final quarter of 2016, according to data from Petroleum Argus. That beat CNBC's fourth-quarter forecast for $49.60 and reflected bullish bets on strong compliance to production curbs from the Gulf members of OPEC.
Judging by early indications, de facto OPEC leader Saudi Arabia is showing production restraint, cutting supply by at least 486,000 barrels a day since October.
Initial signs are "pointing in the right direction" and Gulf producers are "leading by example,'" UBS commodity strategists Giovanni Staunovo and Dominic Schnider wrote in a report published on January 13. "We reiterate our guidance from November to stay outright long oil."
UBS expects Brent crude to average $65 over a three month period and $60 over six months. Prices may peak mid-year, UBS predicts, as higher prices trigger a stronger U.S. supply response which risks capping price gains and delaying the rebalancing process.
Many poll respondents saw pro-oil policies under a Donald Trump administration as an additional downside risk for prices.
"I'm convinced that prices will fall through the year as the market recognizes that OPEC is not complying, Russia does not comply at all, U.S. shale recovers massively thanks to some steps of the Trump administration," said Eugen Weinberg, head of commodities research at Commerzbank.
"OPEC is not in control of prices anymore anyway. It's just another price-taker, the price-giver is shale."
Avtar Sandu, senior commodities manager at Phillip Futures in Singapore added: "OPEC would be content with a very slow appreciation of prices since they are wary of sending positive signals to American shale producers."
Despite bearish predictions calling for higher U.S. supply, Trump's pro-growth economic policies - if enacted – could prove a powerful counterweight, boosting fuel demand and supporting prices.
"Demand may well turn out to be the dark horse of 2017," said Virendra Chauhan, analyst at consultancy Energy Aspects.
Oil bears highlighted the accumulation of long positions in the futures market - or bets on rising prices – based on optimism of strong OPEC compliance, as another key risk.
"What the market has to fear the most in Q1 is the market itself," said Saxo Bank's head of commodity strategy Ole Hansen. "The almost extreme build up in bullish oil bets following the OPEC deal has once again raised the risk of non-fundamental driven correction."
Hedge funds built a record net long position of 796 million barrels by the middle of December, up from a recent low of just 422 million barrels in the middle of November, according to data published by regulators and exchanges. Positioning looks less stretched now, however, at 776 million barrels by January 10.
"There is a lot of length that has been added to the market,' BNP's Tchilinguirian added. 'If the market is disappointed by producer action, this length can easily be withdrawn precipitating a price correction."