Oil prices could increase moderately this year, but geopolitical events could push toward more volatility with additional uncertainty surrounding the Iran deal.
Both Brent crude, the global benchmark for oil prices, and West Texas Intermediate crude faced more volatility last week amid concerns about bloated inventories, threats of a trade war with China and after President Donald Trump’s abrupt firing of Secretary of State Rex Tillerson and national security advisor H.R. McMaster.
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Incoming Secretary of State Mike Pompeo and Trump’s pick to be national security advisor, John Bolton, are seen as hardliners on the Iran nuclear deal, which was negotiated in 2015 by the Obama administration along with the U.K., China, France, Germany and Russia to slow Iran’s nuclear activities in exchange for oil exports. Trump made overturning the deal a campaign promise.
The U.S. had indicated that Trump will not sign the deal by the May 12 deadline unless it is rewritten. The time frame to renegotiate the terms of the pact is likely not realistic because of the current political climate, says David Hewitt, global head of oil and gas research for Credit Suisse, a Swiss investment bank.
“Uncertainty will be factored in global oil prices as we move toward that date as people speculate,” he says.
Another key date that could affect oil prices is the outcome of the targeted Venezuelan presidential election, which has been postponed once already. The country’s production and exploration of oil have slowed “significantly” since the last quarter and the looming question is whether Venezuela is “moving toward a tipping point” and what its effect would be on production, Hewitt says.
Both of the major geopolitical events in May would “skew expectations to the upside of crude,” he says.
The fundamentals in oil production, Saudi Aramco’s pending IPO along with the outcome of the Iran deal and Venezuela’s election are likely to push oil prices more to the “upside than the downside” in 2018, Hewitt says.
Prices are likely to remain relatively stable this year as America’s shale oil producers have emerged as the ‘swing’ suppliers in the global market, says Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University’s Cox School of Business in Dallas.
“The U.S. is now exporting an average of 2 million barrels per day because the shale producers have great flexibility and the ability to ramp up production quickly,” he says.
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A major trade war could develop with countries like China and Korea slapping tariffs on U.S. oil in response to American tariffs on their steel. “We could see more volatility in oil and gasoline prices here at home,” Weinstein says.
Oil prices should remain in the $60 range by the end of 2018 barring an unanticipated economic or political shock.
“If global economic growth remains strong, average oil prices could rise a few dollars in 2019,” he says.
The supply demand dynamics appear to have shifted and higher prices seem more likely in the intermediate and longer-term period, says Patrick Morris, president of All American Oil and Gas, a San Antonio, Texas-based oil and gas company. The outcome of the contribution of the shale producers could affect prices.
“We have seen a few data points that suggest that we will get to 11 million barrels of production, but increasingly people are questioning the actual financial returns on some of the horizontal drilling in west Texas,” he said. “The long-term shale story seems to favor fully integrated companies that can take advantage of wide crack spreads and retail sales of gasoline and diesel.”
The spread between WTI and Brent prices should widen as shale production increases, but these producers may not change the supply demand imbalance. The U.S. is consuming 10 million barrels per day as global demand is rising.
The incremental supply can only come from Russia or Venezuela and both countries benefit from higher oil prices, he says.
“I think that OPEC and Russia will continue to limit supply and Brent will reach $75 while WTI will rise to $69 by the end of the year,” Morris says.
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Oil prices have been propped up by a few major producers that have withheld production in order to avoid an oversupply situation, which could put further downside risk to prices, said Marshall Lynn Bass, managing director of Silverstone Energy Partners, a Houston-based fund which invests in U.S. energy and production projects and companies.
“U.S. oil production is up 22 percent since mid-2016 and the rig count is now over 800 versus about 609 last year,” he said. “I can’t see oil getting over $65 this year without some sort of geopolitical interruption to production.”
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What Investors Should Expect From Oil in 2018 originally appeared on usnews.com
