Thoughts on 2018
Seems like 2018, at least in its first half, is going to be dominated by the same main key themes as 2017.
Balancing global inventories:
The core issue that will be driving the price of oil will continue to be whether and when the global oil inventories will reach a balance point during the year.
The current production reduction agreement between OPEC and the Russian-led group of non-OPEC producers is showing some results in reducing the global excessive oil inventories and OPEC expects to reach a supply/demand balance by end 2018. Some countries, like Iraq, are expecting it even sooner.
However, the speed with which it is achieved still depends on the rate of growth in US shale output. The general belief is that US shale production will continue to increase but the issue is by how much?
Even though companies may be keen to increase output there have been problems along the way. Operating costs have been rising and logistics problems are hampering developments. A lack of ongoing investment sources are putting restraint on the pace of drilling. But more recent data suggests there is now a pickup in activity as we approach the new year.
The IEA said in its December Oil Market Report that it actually expects inventories to begin rising again in 2018, mainly due to growth from U.S. shale.
Ending the OPEC deal and an exit strategy:
The stock surplus is now at about 100 million barrels more than the targeted five-year average, which is down two-thirds from the start of 2017. If this surplus should further decline during 2018, then at some point OPEC will be considering how to unwind these current production limits.
The markets will be looking very closely at how this will be achieved without again creating further increases in inventory levels. Any sudden return to previous production levels by revenue-hungry producers will inevitably result in lower prices.
So we can expect that OPEC will opt for some sort of gradual lifting of the production limits, but compliance will again be a major factor in its effectiveness.
Changes in demand:
Another major factor that will continue to affect oil prices will be changes in global demand and, in particular, from China. Any revisions to earlier estimates by the various agencies and investment bänks, etc will noticeably impact on prices during the year.
Unexpected outages and geopolitical risk:
Regardless of the forecasts and predictions regarding global production and demand, the market will inevitably be affected by any unexpected outages such as the recent cracking of the North Sea Forties pipeline and its subsequent shut down. The spill from the Keystone pipeline in the U.S. was another example as well as the recent explosion in a major oil pipeline in Libya.
Other potential geopolitical flashpoints could also lead to supply outages in 2018. For example, the declining production levels in Venezuela, instability in countries like Nigeria and Libya, and other tensions in the Middle East.
All in all, it seems there is plenty of potential for some significant moves in both directions during 2018, but maybe the most appropriate general strategy will be to trade from the long side and buy into the inevitable dips along the way. At least, that is my intention for 2018…
California oilfields from 1930’s