2017 has seen a significant, if not volatile, recovery in the price crude oil from its 2016 lows, where both WTI and Brent traded below $28 per barrel. Looking forward, there is a number of supply and demand factors one can look to, to see where oil will go in 2018. The rally in prices over the past year has been driven by a sustained crude global supply deficit. Recent commentator sentiment has been bullish with analysts from the likes of Goldman Sachs and Morgan Stanley raising 2018 price outlooks for Brent to over $60 a barrel.
It is the actions of OPEC, the cartel of oil-producing nations, that have been at the heart of this deficit. OPEC is currently limiting supply by 1.8 million barrels per day and in November the cartel agreed to extend this curb of production through to March 2018. Adherence to agreed production cuts has traditionally blunted the impact of OPEC on oil prices. Recently, compliance with agreed production cuts has been historically high. hovering around the 90%, mark according to a report by Reuters.
However, geopolitical tensions threaten to undermine this unity. Tensions between Saudi Arabia and Iran have been escalating in recent months as the two fight a bitter proxy war in Yemen and struggle for influence in Yemen. Saudi has made concessions to its regional rival since the lifting of sanctions allowed Iran to resume oil exports last year. Under current agreements, Iran has actually been able to raise its production whilst other members of the cartel have made significant cuts. It is hard to see this leniency continuing as Iran backed Houthi rebels in Yemen fire ballistic missiles at Saudi’s capital.
OPEC cooperation with Russia has been an unprecedented and crucial factor in the cartel’s ability to drive prices back up to their current levels. However, with GDP returning to growth and the country’s budget deficit no longer ballooning, the Kremlin may become increasingly eager to bring production cuts to an end. Russia and Saudi have fundamentally different aspirations for the price of oil. Russia has declared its intention diversify its economy and reduce the government budget’s dependence on oil revenues. Anton Siluanov, the Russian finance minister, declared earlier this year that government spending was budgeted with a theoretical oil price of just $40.
Indeed, Russian economy minister Maxim Oreshkin defiantly announced that the country could “live forever at 40 dollar oil”. Conversely, Saudi’s sprawling welfare system and costly foreign wars mean it needs a price of at least $65 per barrel to balance government spending. Despite a near double-digit budget deficit in 2017, Saudi’s King Salman outlined record high spending plans for the next financial year. With Russia and OPEC’s Kingpin seeming to have such divergent views, cooperation beyond the current March 2018 agreement seems questionable.
Conclusion
US crude production remains a serious threat to global oil prices. It currently sits at record levels of over 9.5 million barrels per day. While many analysts had predicted that much US production was not profitable at today’s prices, advances in drilling techniques and technology are allowing many producers to remain profitable even at prices below $50 a barrel. Furthermore, the small scale and low Capex required to conduct shale-drilling means US producers are able to rapidly respond to small changes in the oil price.
Society is seeing a trend of production cuts by OPEC being swiftly replaced by US shale production. Despite its partnership with Russia, the power of OPEC to dictate global oil prices has never looked so frail. Even with robust global GDP growth and oil demand to continue to surge, today’s prices seem shaky a best. One thing seems clear, the days of $100 oil are unlikely to return.
The post The Price of Oil in 2018: What Will It Be? appeared first on The Market Mogul.
