Year of Recovery? Making Oil Price Forecasts in 2018

Betting on the oil price is risky business. But, for the oil and gas sector – from explorers to traders and all the players in between – 2018 will be a time to ante up or fold.

After three years of price shocks and instability, this year is expected to be a year of recovery, or at least stability, for the sector.

Wood Mackenzie, in the company’s upstream outlook for 2018, went as far as to say this year would see the oil and gas players going from “survive” to “thrive.” “Now that the belt–tightening is done, companies are looking to deliver profitable growth and build for the future. We also expect to see signs that the investment cycle is starting to turn and the sector has reset itself to operate at lower commodity prices,” said Senior Vice President Tom Ellacott.

Everyone is asking the same question: What will the oil price do in 2018 and beyond? It is a question that is incredibly difficult to answer, and predictions vary.

Understanding the Price Drop

To predict where oil prices are headed in 2018, and the years to follow, it is important first understand why the prices plummeted from $115 per barrel in 2014 to below $28 per barrel by early 2016.

Unlike the price crash of 1985, which was credited to an oversupply, and the crash of 2008, which was due to re

duced demand, the 2014 crash has been linked to both — an oversupply of crude from major OPEC players and the rise of US shale oil, and reduced demand as emerging markets like China and India experienced slower growth, according to the World Economic Forum. The result has been a sustained low-price environment.

While producers can do little to boost demand, The Organization for Petroleum Exporting Countries has taken a shot at stabilizing supply. Long viewed as one of the most powerful intergovernmental cartels in the world, OPEC was forced to join forces with non-OPEC members for production cuts to have a chance at success.

Despite political differences and strife, in November 2016, a landmark deal was reached between OPECand 11 non-member countries to cut 1.8 million barrels per day from the market in effots to stabilize prices. The deal was originally expected to last through 2017, but was extended through the end of 2018 to further reduce an oversupply. With the continued crude production, production cuts approved in December 2017, OPEC is now predicting an increased oil demand and a market balance by the end of 2018. The cartel is betting for world oil demand to grow by 1.51 million barrels per day in 2018.

Brent Price Forecasts for 2018:
Barclays: $60 per barrel from $55
Citigroup: $54 per barrel (unchanged)
Goldman: $75 per barrel from $62
JPMorgan: $70 per barrel from $60

The International Energy Agency, however, isn’t as optimistic, expecting stockpiles from U.S. shale to grow more than OPEC has allowed, and a slight decline in demand growth, from 1.5 million barrels/day in 2017 to 1.3 million barrels per day in 2018.

“Just as the OPEC oil ministers were sitting down in Vienna, our colleagues at the US Energy Information Administration released data showing that for September, US crude oil output increased month-on-month by 290 kb/d to reach 9.48 mb/d. The highest monthly average since April 2015 and 928 kb/d above a year ago,” said the IEA in their monthly oil market report.

Still, the OPEC cuts have thus far been successful in dragging up oil prices, with prices rising over 20 percent since the deal was initially made in 2016. However, each time the oil price rises, rig counts

in the US also increase. Crude production from US shale production is certainly one of the factors keeping prices suppressed,and there is a lot of uncertainty as to how much shale crude can be pumped in a $60-$65 world, with the estimates ranging from 500,000 barrels per day to over 1 million barrels per day.

Another damper on the oil and gas prices is the lack of an exit strategy for the OPEC-led production cuts. In the latest deal, Russia expressed the need for an exit strategy from the production cuts and pushed for a review as early as mid-2018. Saudi Arabia and other leaders, however, have been more hesitant to talk about an exit and have insisted an exit would be gradual.

Traders will continue to watch a potential deal closely, however, knowing that many countries involved in the deal, especially Russia and Saudi Arabia, have plenty of crude in reserves that can quickly be released into the market.

Although the uncertainty can seem overwhelming, the oil business is not stranger to market volatility. Despite some guesswork about what oil prices will do this year, most analysts expect upstream development to move ahead at a faster pace. Wood Mackenzie predicts major project sanctions will increase from just over 20 to 25 in 2018.

“The rise in project sanctions will be a clear sign that new projects can work in a low-price environment,” said Ellacott in a Wood Mackenzie press release. “Oil and gas companies will continue to adapt portfolios to perform at high and low prices and also to provide a platform for longer-term energy transition.”

While the next year will dominated by predictions as to what the oil price will do, a trend that is sure to continue is cooperation — both at the governmental level and within the private sector. Governments and associations will continue to seek stability in the market, as made evident by the OPEC-led production cuts, while companies will continue to seek a diverse range of partners to bring projects to fruition.

The result, even if the oil price does not continue to climb, will likely be a stable 2018.

September 5-7, 2018 Cape Town International Convention Centre