Heading into 2018, there are plenty of reasons for those in the oil & gas industry to be optimistic. For the first time in three years, oil prices for WTI have broken through the $60/bbl price barrier. In addition, the US rig count has more than doubled since May 2016. This has brought back much needed jobs to rig operators. Probably the most notable is the recent OPEC production cut extension. In December, OPEC and Russia agreed to extend production cuts until the end of 2018 . But even with these bullish signs, there are still ominous clouds on the horizon which may cause some concern. The prospect of rising US shale production, geopolitical risks such as Venezuela’s debt crisis and weakening demand caused by a global recession could erase all of our recent the gains made. But for now, optimism abounds. In this article, I will discuss 5 major reasons why oil prices (and hopefully employment) will end up in positive territory by the end of 2018.
OPEC / Russian Cuts Extended
Okay, so this is the first and the obvious answer. The biggest hindrance to price appreciation has been the global glut of oil supplies and weakening demand. In May of 2017, OPEC and other non-member countries agreed to extend production cuts through March 2018. As a result, oil prices have seen a 20% increase since September. In early December, those cuts were further extended until the end of 2018. As a result, many industry analysts revised their 2018 forecasts to the upside. I also realize that what OPEC gives, OPEC can take away but this time, Saudi royal family has much more to lose should the price of oil collapse.
Strong Chinese Demand
Since the oil bust, China has been aggressively stockpiling its crude reserves. Importing 8.5 million bpd, they have become the world’s largest importer of oil. According to a recent IEA report, “China has played a major role in global crude oil markets by helping to clear most of the excess seen in the last two to three years.” That demand is expected to increase into 2018 as China increases its refinery capabilities.
In an interesting article recently posted by Bloomberg, recent satellite images indicate that China is putting less oil into storage and has indeed increased their refining capabilities. According to the article, “China’s overseas crude purchases jumped to the second-highest on record last month, rising 13 percent to 9.04 million barrels a day, as new refining units starting up boosted demand.”
Long Term Trend
As the interactive chart displays below, the overall price trend has increased since the beginning of 2016. The current price is closing on the next level of resistance of $60.82 set in June 2015. In the short term, we will probably see a reversal of price appreciation as oil traders take their profits and sell. In the longer term, if WTI continues its upward trend and closes above that level of resistance, we could see continued price appreciation into 2018.
Crude Supplies Decline
According to the EIA, U.S. commercial crude stockpiles fell by 7.4 million barrels in the week through Dec. 29, a larger than expected drawdown. This extended the trend into its seventh week. Freezing weather throughout the US has increased short term demand, especially for heating oil. Another interesting trend is shown in the chart below. The US Ending Stocks of Crude Oil (the amount of crude held in inventory excluding Strategic Petroleum Reserves) has been in decline since March 2017.
The Cycle of Fear Returns
In an interesting article recently written by author and energy expert Robert Rapier, theorizes how oil prices have always been driven by cycles of fear and complacency. During “fear cycles”, the price of oil tends to climb and fall during cycles of complacency. According to Rapier, the last fear cycle was fueled by the “peak oil” theory from 2005-14. According to this theory, oil production peaked in 1970 and has been in a state of “terminal decline”. Complacency took over in mid 2014 as the shale oil boom pushed production past supply and market share was defended. The result of the oversupply of oil caused the price to collapse.
Rapier argues that in 2018, fear will return to the markets as geopolitical events take center stage as global demand continues to increase and inventories continue to decline.
The New Normal?
Currently, all the signs for the oil and gas industry in 2018 look pretty optimistic. Most analysts agree that oil prices will average between the low to mid $60’s. Nobody is predicting a return to the prices seen during the shale boom of the last decade. Instead, prices in $60 – $65 range might be the new normal.
About the Author
Tim Cook is the Sr. Manager for the midstream/upstream division of PathFinder Staffing, an oil & gas recruiting agency located in Houston, Texas. For more information about our services, visit our web site at www.PathFinderStaffing.com or call us at (281) 858-7325.
- 6 Jan, 2018
- Tim Cook
- 0 Comments