The OPEC extension coupled with U.S. shale will turn the 2018 market into a battleground, analusts say.
While Friday saw the end of a three week losing streak for the market but prices still flat with West Texas Intermediate eking out a 1 percent gain, experts now worry that the highly-anticipated extension of the Organization of the Petroleum Exporting Countries (OPEC) crude cutback initiative will merely keep prices lower for longer and lead to calamity in 2018.
Those focused on the near-term (meaning, this week) took some solace in WTI ending Friday's session at $47.73 per barrel and posting the biggest weekly gain in six weeks, while Brent rose 6 cents to $50.83 per barrel.
Andrew Lipow, president of Lipow Oil Associates, said, "We're seeing a pullback in price: the market overall is trying to balance OPEC and non-OPEC production cuts with increasing production all over the world as they reduce their costs and improve their efficiency."
Fared Mohamedi, chief economist, The Rapidan Group
The supply and demand balance for 2018 looks very bad
He added that the market is also "slowly taking note" of increased production in Canada.
Talk on Friday again focused on the likelihood of OPEC deciding to extend its crude cuts when it meets in Vienna on May 25, and Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said that for the near term, the market will be watching for a possible drawdown in U.S. rig counts.
But whatever outcomes may occur in the weeks and months ahead, they could be eclipsed by bedlam next year: that is the contention of Fared Mohamedi, chief economist at The Rapidan Group, who told BloombergMarkets that "The supply and demand balance for 2018 looks very bad: that's when the big fight is going to happen."
Martijn Rats, oil analyst at Morgan Stanley, agreed, and explained why: "Risks are emerging to 2018 balances: the U.S. is set up for strong supply growth next year, that could exceed 1 million barrels per day (bpd)."
Presumably, the U.S. will be further emboldened by continued OPEC cutbacks, thus ensuring flat prices for the rest of 2017 and leading to a battle between the superpower, OPEC, and Russia: "The dilemma now for OPEC and their key non-OPEC partners Russia and Oman is that cutting to support prices risks stoking the embers of a shale fire storm," said Adam Ritchie, director at Petro-Logistics.
Further defining the 2018 battleground is the U.S. Energy Information Administration, which calculates that American crude production will surpass 10 million bpd by late next year, exceeding the record high set in 1970; this will propel non-OPEC output up 1.3 million bpd in 2018 and fill up almost all the expected growth in demand.
Earlier last week Kho Hui Meng, president of Vitol Asia Pte., suggested that the seeds for calamity next year have been evident for some time, with consumption forecast to expand this year by about 1.3 million bpd but so far limited to about 800,000 bpd, and U.S. output growing 400,000-500,000 bpd more than expected.