Oil Makes Strongest Start to the Year Since 2014, But Moody's Says Prices are Heading Down From Here

Tuesday January 2, 2018

Although U.S. crude on Tuesday hit a peak of $60.74 per barrel, its highest level since June of 2015, violent anti-government protests in Iran ultimately caused it to settle at $60.37 - and if Moody's Investor Service'snew forecast is accurate, it will stay at that level and perhaps well below for the rest of 2018.

Brent dropped 38 cents to $66.49 per barrel, but this was still enough for both benchmarks to open the year above $60 since January of 2014.

William Dinning, head of investment strategy at Waverton Investment Management, said of Tuesday's crude performance, "There doesn't seem to be any great political risk premium in the oil price at the moment and again we think that might be supportive."

More optimism was offered by Giles Keating, managing director at the Werthstein Institute, who pointed out that predictions of further interest rate rises prove to be correct over the next 12 months, then this would "really matter" for U.S. shale supply: "Shale is not going to be such a bottomless production pit this year."

Yet more upbeat remarks were uttered by David Thompson, executive vice-president at Powerhouse, who said that despite Tuesday's trading weakness, "both Brent and WTI remain in solid, long-term bullish trends — $58.95 is nearby support on WTI front-month futures and $65.60 is the corresponding support on front-month Brent futures."

However, those more appreciative of the resiliency of U.S. shale injected a note of warning into the proceedings: Barclays reminded everyone that the Americans are still on course to break through the 10 million barrel per day production mark: "We think U.S. tight oil production growth warrants close monitoring as it could spoil OPEC's market-balancing efforts, pushing the market into surplus in 2018," it wrote, referring to the Organization of the Petroleum Exporting Countries' agreement to extend its output cuts by up to the end of this year.

Moody's is also mindful of U.S. activity, and on Tuesday it went a long way in dampening the can-do spirit of the other analysts by stating that "Prices will likely remain range-bound, and possibly volatile, on a combination of increasing U.S. shale production, reduced but still significant global supplies, and potential non-compliance with agreed production cuts - especially if demand growth is more tepid."

Moody's expects oil prices in the range of $40 to $60 per barrel in 2018.

Others focused on fundamentals think crude's gains over the past week will evaporate sooner than many might expect: this was the contention of JBC Energy GmbH, which last week stated that "The current highs are unsustainable in the short-to-medium term, with prices likely to head back down below $60 once we get past January."