With West Texas Intermediate hitting $66.66 a barrel last Thursday, my forecast of between $50 and $60 a barrel for January was too pessimistic. There were a number of factors that led to higher oil prices, including uncertainty regarding potential new sanctions against Iran, international oil inventories depleting faster than expected, hedge funds’ extreme positioning in oil futures, solid cooperation amongst OPEC members with the possibility that Russia might work cooperatively with OPEC for many years, a depreciation of the US dollar, strong economic global growth, declining oil production from Venezuela, and a buoyant stock market where the S&P 500 has appreciated roughly 7 percent so far this year. All these factors have led to optimism that oil prices will remain strong this year.
I am always cautious about large price moves. Although the prior and other factors might propel oil prices even higher, I expect that prices will be bound between $60 to $67.50 for the next few weeks. While there is some room to the upside, I anticipate that the prior factors will likely prevent oil prices from falling too far in the near term.
Because I have been surprised by the strength of both oil prices and the stock market during the first few weeks of this year, I do not have much conviction in my oil price forecast. I am taking a wait and see approach for February and will reassess toward the end of the month.
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.
With WTI prices at about $58.00 per barrel, I am updating my WTI oil price forecast upward over the next several weeks to range between $50.00 and $60.00 per barrel. As mentioned last month, geopolitical uncertainties are likely to have created a floor near $50 per barrel. Aside from the conflict between the Kurds and Iraqis, North Korea’s nuclear ambitions, and the potential for President Trump to decertify the Iran nuclear deal, the arrests in Saudi Arabia have added to the list of geopolitical uncertainties.
In its latest monthly report, the International Energy Agency lowered its global crude demand growth outlook by 100,000 barrels per day for 2017 and 2018. The reduction in demand growth was in direct opposition to the Organization of Petroleum Exporting Countrie’ report that raised demand growth. If the IEA is correct in its forecast, current prices might not be sustainable.
On November 30, OPEC and Russia are scheduled to announce their decision whether they will extend their oil production cuts past March of 2018. Most, including me, expect that the cuts will be extended to the end of the year. Even if the cuts are extended, the bulls might declare victory and reduce their long positions. On the other hand, prices might rise even further with decreased uncertainty.
Because of the extended rally in oil prices and because of IEA’s reduced growth demand, I am cautious about oil prices escalating much further in the near future. I do appreciate, however, that global oil inventories are falling, and that might cause prices to spike higher. We should gain more insight after the market’s reaction to OPEC’s decision.
I am updating my WTI oil price expectations for the next several weeks to range between $50.00–$57.50 per barrel. The bottom oil-price limit is higher because geopolitical uncertainties have likely created a floor near $50 per barrel. The geopolitical uncertainties stem from the conflict between the Kurds and Iraqis, North Korea’s nuclear ambitions, and the potential for President Trump to decertify the Iran nuclear deal. Another positive factor is the upcoming OPEC meeting at the end of November where many expect the agreement limiting crude-oil output to be extended beyond March 2018. The top oil-price limit has been raised because, with recent WTI prices being near $54 per barrel, it leaves further room to the upside. At current prices, producers are hedging their future production and will, therefore, produce additional volumes that should damp further increases in oil prices. With oil prices near $54 per barrel, I expect that WTI is near the higher end of its near-term range.
A good friend Paul Precht recommended that I view a YouTube video “Tony Seba: Clean Disruption – Energy & Transportation.” Seba offers a fascinating presentation of how he sees the future of energy and transportation unfolding. Even if he is only half correct, there will be dramatic changes for society and especially Alberta. After viewing fifteen minutes of this hour-long video, you will be hooked. I urge you, though, to set aside an entire hour—you’ll not be disappointed.
Precht and I met during the 1990s when we worked together to create a new fiscal framework for the oil sands industry. At that time, he was working at Alberta Energy, a ministry of the Government of Alberta, and I was working at Syncrude. We have remained in touch throughout the years and have collaborated on several projects as consultants.
On the topic of energy, my WTI oil price expectations for the next several weeks to range between $45–$55 per barrel, a slight increase from my expectations of last month. After reading a few articles—for example, “Mission Accomplished? OPEC banishes contango: John Kemp”—that claimed reduced oil inventory levels in advanced economies, I am slightly more bullish.
The next few weeks will be interesting because this is typically a shoulder period between high demand from summer driving and high demand for winter heating. Refineries are often shut down for maintenance to take advantage of this slow time. With the recent storms in the Gulf Coast, I am curious to see how this year’s shoulder period evolves. Also higher prices may provide incentive for drilled but uncompleted wells (DUCs) to be brought on stream, not to mention that higher prices might inspire new drilling. Unless there is a spike in demand, these events ought to have a moderating effect on a steep oil price rise. Given this backdrop, I am have raised my expectations from last month.
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