By all accounts, other than Bitcoin and other cryptocurrencies, crude oil and the economics underlying its price, will be the one to watch in the new year.
Not that it hasn’t garnered enough attention over the past century, but with the specter of rising output in the U.S. and even pipeline-starved Canada, pitted in a tug of war against OPEC’s (and Russia) commitment to restrict crude production, casts 2018 as a year that promises a most uncertain outcome. As usual, there are a myriad number of analysts offering divergent forecasts and outcomes for oil’s fate.
Setting aside the climate change pronouncements by some pledging to pull out of funding upstream oil projects, which pales by comparison to those looking to invest given +$50 a barrel oil, the reality is that oil will continue to play a central role in the world’s economy for the near future. A narrative is now emerging that will either see crude head towards some form of correction or build on the momentum it achieved this year with another solid $5 to $10 a barrel rise in valuation.
For the doves, the primary focus is on U.S. shale oil production, which in an environment of $55 oil, will see domestic production reach an all-time record of 10.2 barrels a day by year’s end, if not sooner. Pointing to the International Energy Agency’s (IEA) recent prediction that non-OPEC oil production will rise by 1.4 million b/d in 2018, several commodities traders and investment banks suggest that global demand for oil will only grow by 1.2 million b/d due in no small part to the rise in oil prices over the last year. However, it is this small increase in supply that offers an opposite take by crude hawks.
The fact that excess global production has fallen from 1.7 million b/d in 2015 to a mere 200,000 b/d for 2018 demonstrates a tighter global supply and demand balance, even in the face of moderating demand from countries like China or economic stagnation as some worse case scenarios envision for the next 365 days. For crude oil optimists, the dour mood for oil isn’t related to inevitable shortages or other weather-related or geopolitical events. Indeed, they point to events which just occurred as recently as last Sunday, when the Brent oil-based Forties pipeline which carries oil from the North Sea to European markets and a major artery to the global oil picture, slowed due to concern over cracks in the pipeline’s casing. The mere prospect it could be out of service for up to and past New Year’s, suggest the surplus scenario offered by oil pessimists, may already be in need of revision as no other sources can quickly ramp up to meet the growing shortfall, not even U.S. shale producers.
2018 looks to be on track to be a lot more expensive for transportation than many might assume.