Oil resurrection sets stage for another OPEC-shale clash in 2018
Investors will watch whether the price recovery fuels a new flood of U.S. output
Oil continued its revival from the biggest crash in a generation, with prices set for a second annual gain after a year marked by hurricanes, Middle East conflict and the tussle between OPEC and U.S. shale.
Futures are up more than 12 per cent in 2017, having entered a bull market in September. The year’s gains were driven by output cuts by the Organization of Petroleum Exporting Countries and Russia, along with geopolitical tensions in the Middle East and pipeline disruptions from the North Sea to Canada and Libya. In 2018, investors will watch whether the price recovery triggers a new flood of U.S. output.
“The current highs are unsustainable in the short-to-medium term, with prices likely to head back below US$60 once we get past January, but for now the season of goodwill appears to be in full swing,” said analysts led by Michael dei-Michei at consultants JBC Energy GmbH in Vienna.
Speculation is rising that American drillers will put more rigs to work as oil strengthens, with shale growth driving forecasts of record U.S. supply in 2018. That could undermine plans by producers including Saudi Arabia, who have pledged to extend production curbs through the end of 2018 to wipe out a global glut. After hurricane Harvey shut Gulf Coast refiners at the end of August and hurt prices, violence in Iraq and a pipe crack in the U.K. have helped buoy crude.
Capping a year of gains, West Texas Intermediate is trading at the highest level since mid-2015, buoyed above US$60 a barrel by a severe cold snap in the Northeastern U.S. that spiked demand for heating fuel. Oil topped natural gas as the biggest source of electricity in New England on Thursday morning, after temperatures plunged well below freezing.
WTI for February delivery was at US$60.40 a barrel, up 57 cents, as of 12:20 p.m. on the New York Mercantile Exchange. Total volume traded was about 46 per cent below the 100-day average. Frontmonth prices are about 12 per cent higher this year, after rising 45 per cent — the most since 2009 — in 2016.
Brent for March settlement rose 73 cents to US$66.88 a barrel on the London-based ICE Futures Europe exchange. The February contract expired Thursday, after rising 28 cents to US$66.72. The benchmark for more than half the world’s oil has gained 18 per cent this year, after climbing 52 per cent in 2016. It was at a premium of US$6.45 to March WTI.
WTI traded at an average price of about US$51 this year. U.S. crude stockpiles fell 4.6 million barrels last week to the lowest level since October 2015, according to the Energy Information Administration on Thursday. That beat the 3.75 million average estimate in a Bloomberg survey of analysts.
“The tug-of-war between OPEC and the U.S. will continue to pressure oil from trading above US$60 a barrel in 2018,” said Kim Kwangrae, a Seoul-based commodities analyst at Samsung Futures Inc. “Like we’ve seen this year, geopolitical risks will be the key factor going forward for oil to breach US$60.”
Another possible risk for oil prices in the new year: U.S. President Donald Trump’s trade agenda. If Trump’s protectionist rhetoric results in real trade barriers, that could boost the value of the U.S. dollar, which would have an inverse effect on oil price, according to Bill O’Grady, chief market strategist at Confluence Investment Mgmt LLC.
“If there is a bearish wild card out there, that’s it,” O’Grady said in a phone interview. “That’s one of the key risks to our business.”
Following an explosion on Tuesday, Waha Oil Co. is working to repair the pipeline that carries crude to Libya’s Es Sider port, the North African nation’s biggest export terminal, while a major U.K. North Sea pipeline is nearing a return to full service after an outage this month.