Crude Oil Touches $70 Per Barrel – Is This A Turnaround?
The new year seems to have brought good luck for the oil and gas industry. The commodity markets, that had been suffering from their worst-ever downturn over the last three years, appear to be finally witnessing a rebound. Within two weeks of the start of 2018, Brent crude oil prices have already jumped by more than 5%, crossing the $70-per-barrel mark for the first time since December 2014. Since the oil prices have surged despite the consistent growth in the US oil output, this is being viewed as a false alarm by some market experts. However, the bulls that are riding heavily on this recovery have strong reasons to stick to their stance. Here’s our take on the situation and why we believe that this could be the actual turnaround for the oil and gas markets. We currently forecast Brent oil prices to average at around $65 per barrel in 2018.
See Our Brent Oil Price Forecast Here
OPEC Production Cuts Have Eased The Oversupply
For the longest time, the Organization of Petroleum Exporting Countries (OPEC) held the position of a swing producer in the global oil markets, implying that the cartel could manipulate its oil output to suit the market situation because of their low cost of production. However, due to the excessive oil dependence of OPEC members, these countries have faced severe fiscal deficits over the last couple of years because of extremely low oil prices.
As a result, the OPEC, along with some Non-OPEC members such as Russia, decided to pull back their oil output by 1.8 million barrels per day (bpd) from January of 2017 until March of 2018. Despite the skepticism about OPEC’s adherence to the cuts, the oil prices rose sharply to over $50 per barrel in the first quarter of 2017, from close to $26 per barrel in the same quarter of 2016. However, due to continued growth in the US oil output, the predicted recovery in oil prices stalled in the later months of the year. This forced the OPEC and its allies to revisit the duration and effectiveness of their production cuts. Consequently, the oil cartel, along with Russia and other Non-OPEC members, decided to extend the output reductions until the end of 2018. The news came as relief to the investors, causing the oil prices to reach the recent high of $70 per barrel.
OPEC Supply To Remain Subdued Due To Production Cuts
Rising US Shale Production – A Threat?
One of the key premises of the OPEC’s production cut was to bring down the US oil inventories back to its 5 year average in order to reduce the oversupply in the markets. Interestingly, since the announcement of OPEC supply cuts in November 2016, the US oil inventories have dropped by roughly 7.5% to 1,883 million barrels, in line with the OPEC’s expectations. At the current level of inventories, it will take some time for the US shale producers to flood the markets and create a similar oil glut in the coming quarters.
That said, the recovery in oil prices over the last year has allowed the US shale producers to reinstate their oil production, which had become non-profitable due to extremely low oil prices. Consequently, the US oil output has grown sharply over the last few months. To put things in perspective, the US oil production has increased from 8.69 million bpd in November 2016, to almost 9.78 million bpd at the end of 2017, representing a jump of more than 12% over the last year. With the extension of the OPEC production cuts until the end of this year, the market anticipates a further rise in the US output in the coming months. In fact, the US Energy Information Administration (EIA) expects the US output to grow at almost 11% in 2018, and estimates the country to surpass Saudi Arabia and Russia in oil production by 2019.
Non-OPEC Oil Supply To Rise Backed By Growing US Production
Although a surge in the US oil production cannot be ruled out, we believe that the US shale producers have learned their lessons from the ongoing commodity slump and have become more conservative over the last three years. Rather than flooding the markets with their shale output and causing the oil prices to decline, they are likely to plan their output expansion judiciously, conserving much of their cash flows for capital investments in the future years.
Our Take
Based on the above discussion, we believe that the OPEC production cuts have been effective in enhancing the oil prices so far. The oil prices have jumped over 40% since the first announcement of these production cuts. However, the rising US output continues to be a crucial factor in the determination of oil prices. We expect to see a steady yet moderate growth in the US output over the coming months. However, we believe that the OPEC as well as Non-OPEC members have already factored in the impact of the surge in US shale output as a result of these output cuts while deciding their production quotas. The cartel expects the oil markets to rebalance by the second half of 2018, taking the oil prices to the $65-$70 per barrel range over the next few months, ceteris paribus (all other things being equal). Thus, we figure that with the reduction in the US inventories and OPEC supply, the global oil markets will have enough elbow room to accommodate the growing US oil supply and will take some time to go into another downturn.
Based on our estimates, we expect Brent oil prices to average at around $65 per barrel in 2018 and gradually increase to $90 per barrel by 2024. Feel free to create our own forecast for oil prices by altering the various demand and supply drivers using our interactive platform.
Brent Oil Prices Are Expected To Average At $65 Per Barrel For 2018
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