Why $80 Crude Oil Is Highly Unlikely In 2018

On January 2, 2018, Byron R. Wien, Vice Chairman in the Private Wealth Solutions group at Blackstone, issued his list of Ten Surprises for 2018. “Byron defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is “probable,” having a better than 50% likelihood of happening.”

Byron’s Ten Surprises for 2018 includes

“The price of West Texas Intermediate Crude moves above $80. The price rises because of continued world growth and unexpected demand from developing markets, together with disappointing hydraulic fracking production, diminished inventories, OPEC discipline and only modest production increases from Russia, Nigeria, Venezuela, Iraq, and Iran.”

Comments

Demand: Continued world growth in oil demand is expected for 2018. For example, the EIA predicts world demand will rise a healthy 1.62 million barrels per day (mmbd), of which 1.2 mmbd is non-OECD (developing markets) consumption.

WTI oil prices averaged around $50 in 2017. A rise to $80 would be a 60% gain. Such a rise, even if temporary, would certainly hurt demand growth, especially in developing markets.

Also, some petroleum exporting countries are ending subsidies for oil product sales in their domestic economies. As a result, oil prices in those countries, such as Saudi Arabia, will be rising, further containing demand growth.

Disappointing hydraulic fracking production: Before December 29th, there was an impression that American shale oil production was not living up to expectations. In the summer, EIA reported lower monthly production figures than it was estimated in its weekly data. Monthly numbers from April through August averaged about 200,000 b/d lower than the weekly estimates.

Based on monthly survey data – not model data — October crude oil production reportedly (December 29th) rose by 167,000 b/d in October from September. What’s more is that Gulf of Mexico (GOM) production was disrupted by Hurricane Nate, reducing GOM output by 200,000 b/d. Without that disruption, the monthly gain would have been a whopping 367,000 b/d. Adding gains in August and September to that figure, the total 3-month gain would be 750,000 b/d.

Even assuming smaller-than-recent gains for November and December, the December production rate should exceed 10,000,000 b/d. Comparing that figure to December 2016, the total gain is over 1.2 mmbd.

Furthermore, the October monthly figure exceeded EIA’s weekly figures (interpolated) by 370,000 b/d. Also, the recent EIA weekly figures averaging 9.775 mmbd are at least 225,000 b/d lower than December is likely to be.

I expect the EIA to revise its forecast for 2018 up by about 225,000 b/d. For a second opinion, Rystad Energy expects EIA could raise December data by up to 300,000 bpd.

OPEC discipline and only modest production increases from Russia, Nigeria, Venezuela, Iraq, and Iran: Only modest production increases are expected by the three leading, public forecasting sources: IEA, EIA, and OPEC. However, if prices rise, the producers will be further tempted to increase production and feel justified in doing so given such a market condition. Saudi Arabia and Russia are particularly sensitive to allowing U.S. producers take market share from them.

Diminished inventories: World demand is coming off of its seasonally strong period and moving into its soft period. Recent stock draws are likely to be offset by stock builds.

For 2018, as a whole, EIA predicts a global stock build, OPEC predicts a moderate draw, and the IEA predicts stocks will remain steady, with seasonal fluctuations.

Conclusions

While disruptions can drive oil prices up in the short-term, ample strategic petroleum reserves exist in the U.S., Europe, and China to take care of any major, unexpected shortfall.

Furthermore, President Trump has proposed drawing down the SPR to help reduce the budget deficit, and so he is more than likely to order such a drawdown should there be a disruption to world supplies.

A rise from the $50 average of 2017 to $80 or more in 2018 is very highly unlikely. On the contrary, the rapid rise in American shale oil production creates the risk of a price drop below $50.

Check back to see my next post!

Best,
Robert Boslego
INO.com Contributor - Energies

Disclosure: This contributor does not own any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.