Crude Hits Two Year High, but Wells Fargo Predicts Bearish Prices Will Continue for Another Decade

Friday November 3, 2017

Once more, expectations of a production cutback extension from the Organization of the Petroleum Exporting Countries (OPEC) combined with rising global demand caused crude to finish the week at near two year high levels, with West Texas Intermediate on Friday setting up $1.10 to $55.64 and Brent climbing $1.55 to $62.27 per barrel.

The gains are said to be triggered by China's oil demand growth: its reported 9 million barrels per day (bpd) of imports have surpassed those of the U.S., making it the world's top crude importer; meanwhile, investors are presumably also buoyed by rising physical oil prices, with Saudi Aramco, ADNOC, and Qatar Petroleum all raising their crude prices for Asian buyers.

Gene McGillian, director of market research at Tradition Energy, said, "There's an idea that the global economy is looking pretty good."

Joining McGillian in the bulls camp was Fereidan Fesheraki, founder and chairman of FGE, who told Bloomberg that he believes oil prices will climb to $65: he said the markets are already pricing in an OPEC cutback extension that will last throughout 2018 instead of just a few months, "and sometime by next summer we'll be at the five years average, and at that time I think prices could easily be $65."

But bearish analysts warn that the OPEC deal is still just speculation, and strong importing figures do not necessarily translate into robust economic growth: in fact, Austin Pickle, analyst for Wells Fargo Investment Institute, wrote in a note that the bank expects the current bear market for oil to last another five to 10 years, with WTI prices stuck between $30 and $60 per barrel.

Pickle justified his forecast by explaining, "Bear markets in commodities are a consequence of human behavior in the preceding bull market; higher prices invite investment in new technology (such as shale oil extraction) — and then production, production and more production — until, eventually, supply overwhelms demand."

Pickle thinks the current bear market has already gone through the first step of weeding out the weakest players, but the next stage is range-bound crude that typically drags on for years, and he pointed out that this phase during the last bear market lasted from between 1986 to 1999.

The long term good news, according to Peter Tertzakian, executive director of the Arc Energy Research Institute, is that those who proclaim the end of oil is nigh are dead wrong: instead, in 20 years we'll probably be consuming 90 million bpd.

Writing in The Financial Post, Tertzakian stated that "By 2030, less than 15 years from now, I expect around 400 million more internal combustion engines will accumulate into the global fleet of passenger cars – even after assuming that electric vehicle market penetration is accelerated with the heavy-handed help of governments around the world."

He added, "Another mythical assumption is that oil consumption is only about planes, trains and automobiles: at least 40 percent of every barrel goes to other industrial uses, like heating, lubricating wheels (electrically propelled or otherwise) and petrochemicals.

"The developing world continues to computerize, mechanize, industrialize and all sorts of other suffixes that contain "-ize" that use more and more oil products beyond transportation."

Purely in terms of price predictions, the opinions change too frequently to be taken seriously: this week alone, respected institutes such as Standard Bank Group warned that nations should brace for $50 crude, while Prestige Economics insisted the current high prices are here to stay.