NBD Sees Oil at $56 Next Year Amid Questions Over Oil Demand Dynamics

Wednesday November 29, 2017

One day before the highly-touted annual meeting in Vienna of the Organization of the Petroleum Exporting Countries (OPEC), several experts on Wednesday suggested oil in the mid-$50s price range was  a favourable level in a world of geopolitical tension and U.S. shale dominance.

Shady Shaher Elborno, head of macro strategy at Emirates NBD, told Bloomberg, "Oil prices are becoming more sensitive to political tension because the buffer of inventories is dropping," and that for 2018 he is "forecasting an oil price of $56," a level he says is favourable to the economies of many countries.

Jeff Brown, president of FGE, told Bloomberg that oil needs to stay around the $55 mark, calling it the "sweet spot" for OPEC "through to probably 2020" because it will, among other things, not overly encourage more U.S. production.

If nothing else, the comments reflect an appreciation of rapidly changing global oil demand dynamics, and they come on the heels of yet another report that the U.S. shale boom is here to stay - the latest indication of this being new hedging contracts in the third quarter of this year covering 897,000 barrels per day (bpd) of annualized production, a 147 percent increase over the second quarter, according to an analysis of 33 companies by Wood MacKenzie Ltd.

Andy McConn, analyst for Wood Mackenzie, wrote, “Producers that are able to lock in prices above previous expectations may feel more comfortable with increasing activity.

“Others may leave budgets unchanged and promote higher cash-flow guidance to an investment community anxious about profits."

Meanwhile, Bloomberg on Wednesday quoted Roger Diwan, a veteran OPEC watcher at IHS Markit, as stating, “Every barrel the U.S. is able to grow now is a barrel that needs to be exported."

He was commenting on reports that U.S. net oil imports, including crude and refined products, last week dropped to just 1.77 million bpd, the lowest level in data going back to 1990; this puts the Americans on track toward its lowest monthly imports since before the Arab oil embargo of 1973, which in turn reinforces the contention that the global influence OPEC and its members once enjoyed is waning.

Of course, any study of crude demand trends is usually accompanied by an enthusiastic nod towards the rise of electric vehicles eventually obliterating the need for oil altogether: the Bloomberg New Energy Finance’s conference on the future of energy expects 530 million EVs on the road by 2040, which would displace 8 million barrels of daily oil demand by that year.

Tomas Kaberger, chair of the executive board at the Renewable Energy Institute in Tokyo, said, “The disruption will come very fast because of economies of scale."

Presumably, all of this would come as a shock to OPEC, which although has repeatedly conceded that alternative energy will one day replace crude, recently stated there is "no peak" for oil demand  for "the considerable future."