Americas News
Crude Trades Flat as Analysts Offer Opposing Outlooks for 2018
The continued suspension of the North Sea pipeline supported prices on Friday while concerns of mounting U.S. output restricted gains, resulting in West Texas Intermediate rising a modest 26 cents to $57.30 per barrel and Brent down 8 cents to $63.23.
The tepid performance caused analysts to cite factors worth noting in the near future that could send prices further south: John Kilduff, founding partner at Again Capital, said, "Demand for gasoline is lower, which isn't normally the case in the holiday season, and supplies are steadily rising; it's something to watch."
Speculation of what the market will do next caused a disagreement of opinion between two of the biggest voices in oil: the International Energy Agency, and the Organization of the Petroleum Exporting Countries (OPEC), the former of whom worried that U.S. supply, now close to matching levels of top producers Russia and Saudi Arabia, will likely create a supply surplus in the first half of 2018.
The IEA believes non-OPEC production next year will swell by 1.6 million barrel per day (bpd), most of it coming from U.S. shale, while OPEC pegs the growth at 1 million bpd; also, although both organizations project that demand for OPEC crude will be about 32.3 million bpd in the first half of 2018, OPEC thinks it will need to pump about 34 million bpd in the second half, while the IEA sees a requirement of just 32.7 million per day.
The disagreement caused Ole Sloth Hansen, head of commodity strategy at Saxo Bank A/S, to state, "Both cannot be right; whichever way the pendulum swings will have a significant impact on the market."
Olivier Jakob, managing director at consultants Petromatrix GmbH, added, "OPEC believes in strong growth of oil demand; the IEA believes in strong growth of non-OPEC supplies."
Unsurprisingly, other experts took sides in the debate: Tom Petrie, chairman of Petrie Partners, told Bloomberg television that while challenges lie ahead, it's important to remember that 2017 began with analysts "wondering if we were going to have 1 million bpd growth in demand or 1.2 million, and we ended up with a much better picture."
He went on to note that "I lean towards OPEC, and I also think that as long as Saudi Arabia and Russia want to work together, there's a pretty good chance the OPEC view is going to prevail here.
"Time will tell, but I think the IEA tends to be a little bit too optimistic about U.S. supply growth."
When asked what is preventing non-OPEC producers from hitting the IEA's forecast of a 1.6 million bpd growth, Petrie replied, "One is the embedded declines in the natural producing base, and I think the IEA tends to underestimate that; two, there's signs that CEOs are getting quite a bit of pushback from their large shareholders about not excessively allocating capital to new development for the sake of growth without an adequate or competitive rate of return on those allocations."
As far as traders are concerned, they too are leaning towards an OPEC view in which prices rise in 2018: Bloomberg reported that over 32,000 option contracts giving traders the right to buy Brent at $80 for June 2018 onward traded in the last week: "That's the equivalent of 32 million barrels, with a total cost of about $9 million."
However, they don't necessarily share OPEC's rosy view of prices rising due to a more reasonable supply and demand balance; instead, according to Bloomberg, "oil bulls argue that shrinking inventories mean that any supply disruptions may provoke sharp price gains: those risks have increased in recent months as tensions ratcheted up between key oil producers Saudi Arabia and Iran, alongside political turmoil in Venezuela and conflict between Iraq's federal government and its semi-autonomous Kurdish region."
Even though OPEC and its allies have worked overtime since extending its production cuts last month to assure everyone that they have been successful in getting rid of the global glut and bringing about market rebalance, they are still cautious about returning to a `business as usual' mode, to the point where the cartel earlier this week disclosed it is designing a framework for supply management after the cutbacks expire next year.
