WTI prices haven’t settled at $80 since Halloween 2014
Tightening global supplies and rising demand for crude oil helped prices for the commodity start the year with a bang—hitting their highest levels in more than three years—and many analysts believe the market has the fuel it needs to continue the rally to as high as $80 a barrel.
“The reason that oil will soar is the oldest story in the oil world: Low prices created strong demand and growth, and now that demand is leading the way,” said Phil Flynn, senior market analyst at Price Futures Group.
Oil futures suffered hefty declines in 2014 and 2015, as a global glut in supplies and the Organization of Petroleum Exporting Countries’s unwillingness to significantly curb production amid fear of market-share loss sliced the per-barrel oil price roughly in half.
On Friday, it notched its highest levels since December 2014, with West Texas Intermediate crude US:CLG8 the U.S. benchmark, settling at $64.30 a barrel on the New York Mercantile Exchange and global benchmark Brent crude LCOH8, +1.11% ending at $69.87 on the ICE Futures Europe exchange.
Flynn expects WTI oil prices to average $67 in 2018, and says they will probably spend some time trading over $70. If OPEC keeps its crude production-cut deal till the end of this year, WTI prices could hit $80 a barrel, he says.
U.S. crude supplies have fallen for eight weeks in a row, for a total drop of more than 39 million barrels, according to the Energy Information Administration. That marks the “biggest drop in history in the shortest amount of time,” says Flynn, a “sure sign that the U.S. oil market is in deficit versus demand.”
The International Energy Agency pegged average 2017 global oil demand at 97.8 million barrels a day, up 1.6% from 2016, according to a report released in mid-December. It showed that global oil supply in November also stood at 97.8 million barrels a day, down 1.1 million barrels a day from a year earlier. The IEA forecasts a further rise in 2019 demand to 99.1 million barrels.
Global demand is rising by over 1 million barrels a day per year, more “than offsetting incremental production from U.S. shale producers,” said Jay Hatfield, chief executive officer of Infrastructure Capital Management.
He expects “robust global demand,” on strong economic growth, to drive oil prices higher this year, forecasting WTI oil prices in the $60 to $70 range during 2018, “with risk to the high side.” Higher prices may bring good returns for oil stocks and master limited partnerships, too, he said.
In recent weeks, geopolitical factors have added support to oil prices, with unrest in Iran, OPEC’s third-largest crude producer, and a crisis in Venezuela threatening output.
But as analysts point out, some potential headwinds remain for prices. It’s fair to say that “too high a price will equal too much oil,” said Denton Cinquegrana, chief oil analyst at the Oil Price Information Service. Cooperation with the output cuts has been “incredible,” he said, with the final quarter of 2017 seeing a nearly 100% compliance rate, according to the EIA. But “the temptation to cheat” may increase along with prices, Cinquegrana said.
Non-OPEC producers, particularly Russia, which participates in the output deal, and the U.S., which does not, are key. “Russia and other oil producers, including the Gulf countries, have re-initiated investment in their oil sectors, and that will lead to increased output down the line, which will surely affect prices,” said Omar Al-Ubaydli, a program director at the Bahrain Center for Strategic, International and Energy Studies.
Meanwhile, “shale remains an enigma; rig counts are in a perpetual game of cat-and-mouse with conventional oil,” he said, with shale oil costs expected to start rising sharply “once they have extracted all of the low-hanging fruit.”
The Trump administration’s plan to open up more U.S. offshore areas to oil and natural-gas drilling as part of a five-year plan may also pressure prices.
The focus for investors could return to the “growing supply led by increasing oil production, rising exports, and potential drilling-friendly policies in the U.S.,” said Maxwell Gold, director of investment strategy at ETF Securities. Those factors may “see the oil price fall back down to $45-to-$60 a barrel within the first half of 2018.”
But “further market rebalancing coupled with rising inflation expectations and a tepid U.S. dollar could help prices find stability within the second half of the year,” he said.
This article was originally published on Barrons.com Jan. 13.