Oil price optimism would be ‘misplaced’ in early 2018, strategists say

CNBC

There’s little reason to expect oil prices to extend gains through the first quarter of 2018, energy strategists have told CNBC.

The prospect of rising U.S. shale production, subdued price movements and intensifying geopolitical risks is likely to offset a rally in prices at the start of next year, the analysts said.

Harry Colvin, director and senior economist at Longview Economics, told CNBC in a phone interview that he was “pretty bearish” over the price of oil over the next three months.

“While we could easily see an escalation of tensions in the Middle East, in the absence of that, optimism is probably misplaced for up to six months… Everybody seems to be facing the same way over oil at the minute and it’s when this happens that you need to be especially careful,” he said.

Oil prices have recovered well over a third of their value since hitting 2017 lows in June. The gains are largely due to the global supply cuts implemented by OPEC and non-OPEC producers at the start of the year.

What will happen with US shale?

Goldman Sachs said a stronger-than-anticipated OPEC-led commitment to extend production cuts would likely support oil prices through 2018. The U.S. bank lifted its Brent price forecast for next year to $62 a barrel and its West Texas Intermediate (WTI) projection to $57.50 a barrel. The revisions were up from $58 a barrel and $55 a barrel respectively.

The U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) have both indicated strong global demand growth in 2018 at 1.3 percent or above.

“A really key nub of the debate with oil is what will happen with the U.S. shale?” Colvin said.

Pump jacks and wells on the Monterey Shale formation in California

David McNew / Stringer | Getty Images News
Pump jacks and wells on the Monterey Shale formation in California

In recent months, U.S. shale producers have surprised market participants with how quickly they have ramped up production in the wake of rising prices. Almost all increases in American oil production over the last few years have stemmed from shale, which in total accounts for nearly two-thirds of the country’s existing output.

The U.S. is not part of a global effort to withhold oil production levels.

Colvin said it would be “easy” for oil to go to $50 a barrel by the end of the first quarter, before adding he would “not be surprised” to see levels as low as $45 a barrel.

‘Volatility killer’

OPEC, Russia and nine other producers agreed to extend their deal to keep 1.8 million barrels a day off the market through the end of 2018. Having extended the deal once already, the producers again reached an agreement at the end of November to try to drain a global crude glut.

OPEC’s latest deal was most likely a “volatility killer,” Chris Main, energy strategist at Citi, told CNBC in a phone interview.

Despite expecting fundamentals to continue to support the market, Main said he forecast oil prices to fall back to around $57 a barrel by the end of the first quarter.

“That price weakness could end up being supportive to the OPEC commitment next year… It would certainly reinforce the will of the Saudis,” he said.

OPEC kingpin Saudi Arabia is head of the cartel’s compliance monitoring committee and is reportedly expected to try to ensure all other member countries stick to agreed production levels over the next 12 months.

‘Bullish catalysts in short supply’

“The major price driver in the first quarter of 2018 will be geopolitical developments,” Stephen Brennock, oil analyst at PVM Oil Associates, said in an email to CNBC.

While Brennock cited Iran’s relationship with the U.S. and Saudi Arabia as geopolitical risks worthy of keeping an eye on, he argued it was likely to be only a “matter of time” before Venezuela‘s worsening debt crisis started to significantly hamper the OPEC members’ oil production.

An attendant sits at a closed Petroleos de Venezuela SA (PDVSA) gas station in Caracas, Venezuela, on Friday, Sept. 22, 2017.

Wil Riera | Bloomberg | Getty Images
An attendant sits at a closed Petroleos de Venezuela SA (PDVSA) gas station in Caracas, Venezuela, on Friday, Sept. 22, 2017.

The South American country has the largest proven oil reserves in the world but, amid intensifying economic pressure, its production levelshave decreased to levels not seen in more than 30 years.

“All things considered, bullish catalysts will be in short supply and prices will therefore settle into their current trading ranges,” Brennock said.

The price of oil collapsed from almost $120 a barrel in June 2014 due to weak demand, a strong dollar and booming U.S. shale production. OPEC’s reluctance to cut output was also seen as a key reason behind the fall. But, the oil cartel soon moved to curb production — along with other oil producing nations — in late 2016.

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