Will oil rise in 2018?
The bulls dominated oil market during the fourth quarter of 2017, spurred by rising fears over supply disruption. The question investors are asking now is, will the upward trend in crude continue into the first quarter of 2018?
The bulls dominated oil market during the fourth quarter of 2017, spurred by rising fears over supply deficits. The Kurdistan conflict took key Iraqi oilfields offline in October and saw oil flows through Iraqi Kurdistan to Turkey drop significantly. Concerns over the geopolitical tension in the Middle East also supported the oil’s rising trend.
Renewed commitment from Opec producers towards the group’s production limiting initiative also spurred on the bulls, while damage to the North Sea pipeline saw Brent crude hit $65 on December 13, a level not seen since 2015.
The question investors are asking now is, will the upside continue into the first quarter of 2018? Opec’s renewed commitment to production cuts will be welcome news to bulls, although many may find their taste for oil dampened by the recent EIA (Energy Information Administration) forecast, which puts US shale production at its highest level yet. US shale output is expected to top 10 million barrel per day by Q4, and could put pressure on oil prices towards the end of 2018, particularly if increases in American output further hinder Opec’s production cuts.
However, there are signs that oil could remain buoyant for the first quarter of the year. Opec’s commitment to its production limits is now evident, and the group has previously promised “extraordinary measures” when it comes to tackling the issue of US shale (itself still recovering from hurricane damage). Continued tensions in the Middle East will also weigh heavily on investor sentiment and supply concerns.
That said, there are potential downsides lurking, and it should be noted that many US refineries are now recovering from earlier hurricane damage. The addition of another couple of rigs in December took the American total to a two-month high of 749 and, if US shale does manage to stage a full recovery by the end of the first quarter, we could see an early increase in production reignite fears of oversupply.
The themes to watch out for in 2018 are very similar to 2017. Namely, investor confidence, risk appetite and oil inventories.
Inventories were thought to have shrunk in 2017, thanks to an increased demand globally. The EIA is predicting a small reversal of this trend for the first quarter of the year but, given that recent restrictions on supply are largely governed by Opec (and future inventories will depend on its ongoing commitment to production cuts), how accurate these predictions will prove to be rely heavily on the group.
Like 2017, the outlook for 2018 will be dominated by the ongoing tussle between US shale and Opec. We’ve only just started to see the potential of the group’s production cuts will have on the markets. Will US shale producers increase output and capitalise on rising prices hard won by Opec efforts? And will Opec producers remain committed to production limits when faced with a major competitor profiting from their efforts? We will have to wait to see how the story plays out. The writer is global head of currency strategy and market research at FXTM. Views expressed are his own and do not reflect the newspaper’s policy.