Expect crude oil prices to remain volatile
International crude oil prices are likely to remain highly volatile with an upward bias in 2018 due to production cuts announced by the Organization of the Petroleum Exporting Countries (Opec) despite a rise in demand.
After hitting a 13-year low of $26.55 per barrel on January 20, 2016, crude oil prices have recovered good ground. However, in 2017, due to sudden swings in supply, oil prices also moved in a wide range. Prices fell to a low of $44.20 on June 21 before recovering on account of a 1.2 million barrels per day production cuts by the Opec members. Towards the end of 2017, prices rallied to trade at a 30-month high of $66.40 as Opec decided to extend cuts till December 2018.
The US Energy Information Administration has predicted crude oil prices to move in the $44 -68 range by March 2018 and average $57 a barrel for 2018.
“The coming year looks very interesting for crude oil, as it could throw up a lot of surprises. Considering that Opec cuts will last for the entire year and demand is set to remain strong, the trend for oil prices should be up. The Opec cuts will make markets more sensitive to any other supply disruptions as well and we could see exaggerated reactions on the upside,” said Kishore Narne, associate director, Motilal Oswal Financial Services.
“However, the growth in US shale will be a key headwind for oil prices and will keep excessive price rallies in check. Overall, we expect WTI Crude to hold in a higher range of $55 to $65 a barrel in 2018. A demand shock or Opec unity failing will be tail-risks,” he added.
Projections by other key domestic research houses aren’t different. Madan Sabnavis, chief economist of CARE Ratings, also believes Brent crude will rise but will not exceed $65 a barrel on possibility of rising inventory and production in the US.
Overall, Opec members will continue to play a dominant role, and any change in their supply policy can increase volatility in oil prices. For instance, Saudi Arabia, the largest contributor of the Opec members’ 32.5 million barrel per day output, had cut its price to maintain market share in 2014, leading to a price war with Iran. Such moves can disrupt oil markets. The market, however, would keep an eye on other key factors that can influence oil prices. Traders anticipate some shift in global demand towards natural gas, which could keep prices under check. India, for example, has witnessed five per cent increase in domestic natural gas production. And, the Indian government aims to shift its current 6.5 per cent natural gas usage to 15 per cent of energy consumption in the coming years. Worldwide, production cuts of crude oil could augment the process.