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Oil Update–December 2017

Back in August, I quoted Dan Dicker saying that oil prices were likely to rise to $60 per barrel by year end, perhaps even $70. At the end of the last trading day of the year and after normal oil trading hours, West Texas Intermediate closed at about $60.10, after hitting a high of $60.51 near the end of the normal trading session.

I had predicted that WTI oil would remain below $60. And perhaps if there had not been a series of exogenous events such as the Kurdish Iraqui conflict, the Forties Pipeline System outage, and the extreme cold snap into the end of the year, prices might have remained below $60 per barrel. Exogenous events, of course, do happen with unpredictable regularity.

On Saturday, a Wall Street Journal article “Oil Prices Expected to Keep Rising in 2018, but It Could Be a Rocky Ride” (subscription required) quote indicated that Brent prices are forecast to average $58 per barrel.

A survey of 15 investment banks by The Wall Street Journal estimates that Brent crude, the international oil-price gauge, will average $58 a barrel in 2018, up from an average of $54 in 2017. The banks expect West Texas Intermediate, the U.S. oil gauge, to average $54 a barrel in 2018, up from $51 in 2017.

As noted at the outset of this article, WTI closed above $60. I expect that once some of the exogenous issues subside, oil prices will retreat. Furthermore, these high oil prices might attract some short sellers to drive prices lower. On the other hand, some argue that world inventories are depleting faster than expected, world economic growth remains strong, and shale oil growth alone will not be sufficient to keep a lid on prices below $60. We will need to watch to see how the oil story unfolds.

My expectation for the next few weeks is that WTI prices remain bound by $50 to $60 a barrel.

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