OPEC’s 2016 return to prominence raised expectations that global oil supply and demand could rebalance in 1H2017. We remain skeptical, however, that the oil producer group can lower supply enough to materially reduce global petroleum inventories. Given tight historical correlations between movements in global oil prices and OECD petroleum stocks, continuing high inventory levels reinforce our bearish perspective vis-à-vis the recent crude price run, and we believe OPEC may need to reset its production quotas at its next regularly scheduled meeting in May. We think President Donald Trump’s pro-production bent and deregulatory agenda appear more likely to deliver narrow, operator-specific upside than a broad and globally significant oil supply response, particularly in the face of organic, price-linked growth by newly disciplined North American oil producers. Similarly, ending a Western coal leasing moratorium may open contiguous acreage and create scale economies for some Western miners, looser rules for overburden disposal from mountaintop mines can lower Appalachian production costs and less frequent safety inspections can improve throughput across the country. Even so, we see few policy levers sufficient to offset organic, power-sector coal displacement by modestly priced natural gas.
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