Sharp Correction Expected in 2018 Crude Prices

With oil prices over 30% higher since June, oil market bulls are finally getting what they wished for this holiday season. Global economic growth is strong and synchronous and end-use petroleum demand continues to outperform historical norms.

On the supply side, OPEC compliance is high. While Venezuela's production keeps slipping significantly month to month, other countries, including Iraq, Nigeria and Libya, could also see disruptions in the coming year.

Outages in the North Sea and hurricanes have unexpectedly tightened the market in the past six months, supporting OPEC's longstanding efforts since 2014 to rebalance it, CNBC reported.

These fundamental factors and OPEC countries' willingness to keep their production in check have reduced excess inventories by half as the New Year arrives. As a result, investors are positioned for a bull rally, leaving the oil market susceptible to a sharp correction should the fundamentals disappoint.

That is one of several reasons why experts are retaining bearish stance for next year, with Brent prices expected to average $55 per barrel.

Two key points are important to note. First, the support mentioned above may not be sustained. Though Barclays Research economists do not expect a recession in 2018, they do expect China's growth to slow, which would exert disproportionate pressure on commodities demand.

And not everyone is covered by the OPEC/non-OPEC deal. Libya and Nigeria's output, though fragile, has the potential to surge 10-20% higher, despite high risk of production.

The output that was offline in Canada is returning, boosting supplies next year and in 2019. The same goes for Brazil, where new supply is ramping quickly. Demand growth can also vary widely, especially if retail prices are higher on the year.

Second, the past year has shown that prices are determined by the speed and direction of inventories. Barclays Commodities Research's balance indicates a return to surplus on average next year.