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Crude Oil Market Analysis For 2018

With crude oil trading near multiyear highs the question on the minds of traders is simple. Where will oil prices go from here?

On the one hand supply, production and capacity are keeping prices under pressure while on the other dubious signs of market tightening, an extension to OPEC’s production cap and geopolitical instability have them edging higher. 

OPEC lowered demand growth forecast in their latest crude oil market analysis Pdf, not a good sign for oil market bulls. Click Here To Go Straight To Our Online Oil Market Analysis Tutorial

crude oil market analysis

Short Term Oil Market Analysis; Outlook Stable, But Dim

Prices are expected to rise, on average, in 2018 according to the latest EIA monthly oil market analysis . The agency says to expect an average $52.77 per barrel of WTI in 2018, up only slightly from the 2017 average and well below levels seen for the global benchmark in the 4th quarter.

This means that while oil prices are expected to remain high, relatively speaking, they are not expected to remain at current levels. At least not for long. According to estimates from the IEA and EIA monthly report the price of crude is expected fall sharply by the end of the year.

WTI is expected to continue trending near $57 and possibly edge higher through the first half of 2017. The second half is expected to see a sharp decline as high prices attract more producers to market, swelling already full storage facilities and furthering supply imbalances.

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The EIA’s short term outlook crude oil market analysis

This means prices for WTI could fall as far as $40 by the end of the year. Estimates from the World Bank concur, they say to expect an average $56 for Brent in 2018, a staggering 11% drop from the $63 it has been trading in the final month of 2017.

Along with a decline in prices the EIA also expects to see a persistent deep discount in WTI relative to North Sea Brent. The spread is expected to widen to an average $4 in 2018 as demand shifts to Brent over WTI. The spread has averaged near $2 in the 2017 year to date period but has widened to $6 in the fourth quarter in evidence of that shift . The deep discount is expected to decline but not until later in the year when the entire liquid fuels complex undergoes a correction.

Oil Market Analysis Demand Growth To Continue, But Slows In 2018

The IEA monthly report expects demand for crude to rise by more than 1% in 2018 but that outlook has dimmed in the past few months. Rising prices and milder than normal temperatures have dampened seasonal appetite.  OPEC has also lowered their forecast for demand growth. The OPEC monthly oil market report expects demand growth to slow to 1.51 mb/d from the current 2017 average of 1.53 mb/d.  Because of this full year 2018 outlook has been revised down by 0.1 mb/d to 98.9 mb/d.

OPEC Production Caps Will Work In 2018?

OPEC, the group of price fixing oil producers in control of 83% of world oil reserves, has been working hard to prop up prices. Many of the member governments, if not all, rely on oil to fund their economies so it makes sense they would want to do something when prices get too low.

Oil Market Analysis

Over the past few years global oil supply has held relatively steady near 97.5mb/d. This is not the maximum possible output but the amount coming to market. OPEC is trying desperately to reduce total available supply in an effort to drain high levels of crude in storage and by extension tighten the market and support prices.

Oil Market Analysis

Fluctuations within the data show a clear correlation between OPEC production and global supply lending credence to the idea the cartel could in fact influence prices for the long term. The caveat is that OPEC production is capped at 32.5 to 33 million barrels per day, near record highs and at levels conducive to amply supplied markets.

The official forecast for OPEC demand is near 33.5 mb/d, up the last 4 months, and slightly above the 33 mb/d production target.  The EIA estimates OPEC production at 32.5 mb/d in 2017. They also estimate OPEC production will rise to an average 32.7 mb/d in 2018. At face value this does represent a deficit and could tighten markets, the question is whether OPEC members will continue to comply with the cap in the face of rising prices, and how does non-OPEC production fit into the picture?

Oil Market Analysis Pdf

In the OPEC monthly oil market analysis PDF news that most of the member and non-member participating nations were meeting or exceeding target cutbacks helped firm support for oil but that support is tenuous. For the most part, upward price pressure is due to expected market tightening more than physical evidence and highly susceptible to correction.

Russia has already been rumored to favor raising production; cash strapped countries like Venezuela are surely eyeing oil reserves as a source for much needed money. It would be all too easy for one or more of them to cheat and pump more than their share, adding to global supply problems. Ironically, Saudi Arabia and Russia are co-chairing a committee designed to monitor compliance to the cap which is expected to remain in place through the end of 2018. The cartel is expected to review the effects of the caps at the June meeting; they may choose to extend or increase the reductions should market conditions warrant it.

US Shale Producers Come Back To Pump

With oil prices on the rise so too are the number of rigs in the non-OPEC world. The magic number to attract US shale producers is near $45 and WTI has been trading well above that for the last few months. This has led to a sustained increased in rigs and the expectation for more to come on line over the next 6 months.

The Baker Hughes Rig Count data shows a marked rise in the number of active rigs in North America. Over the past year the number of rigs has increased by 30% to just over 900 and at highs not seen since before the oil market crash. The increase is adding to global production and largely expected to offset supply OPEC is taking off the market.

Despite OPEC’s production caps the US EIA predicts that global supply will increase by at least 2% in 2018. They also predict that global consumption will increase but at slower 1.5%. This means demand will continue lagging production and sufficiently enough to increase global available supply. The EIA says rising oil prices are attracting more producers back to the market and driving gains in US production. They are expecting total US production of over 10 mb/d by mid-2018 with an average annual increase of 0.8 mb/d.

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OPEC of course disagrees with this notion. They say production caps are working and will continue to tighten markets in 2018. They have raise their full year demand forecast while also lowering expected output from non-OPEC producers which, according to them, will tighten supplies. They expect this to support and lift prices into the end of the year. If prices should begin to fall it is more than likely OPEC will begin talking the market up as they’ve done in the past.

A look to US production levels shows it trending near record highs with an expectation of increasing above 10 mb/d in 2018. Production peaked in mid 2015 with the shale oil bust but has recovered in the past 15 months to regain those highs. This recovery is driven by rising oil prices and likely to continue, up to and until the point production overcomes demand and drives prices back down. Sometime in mid 2018 if EIA and IEA estimates are correct.

The balance of deliveries of crude to US storage have resulted in net decline over the past year but those levels are still holding near record highs. So long as this situation persists upward potential for crude oil prices is limited. With the forecast for production growth to outpace demand growth it seems likely storage levels will rise in 2018, if not by the middle of the year then surely in the 2nd half, and will only add downward pressure to prices.

The US shale producers aren’t the only ones attracted by rising oil prices. The EIA expects an average daily increase of 0.7 mb/d from the combined nations of Canada, Norway, the United Kingdom and Kazakhstan.

Crude Oil Market Analysis Commercial Liquids Supply On The Rise

An important metric of crude oil market balance is the total commercial liquids supply. This is a measure of the total volume of commercially available distillate products and used a gauge of demand for the raw crude. When distillates are on the decline demand for crude is expected to rise as distillers ramp up production, and vice versa.

Over the past year EIA monthly report data shows the volume of commercially available liquids has fallen in tandem with crude oil’s rise to multi year highs. The total volume has fallen more than 4.5% but, despite OPEC’s pledge to continue curbing supply, is expected to tick higher in 2018 as demand increases lag production. This can already be seen in US refining data which shows deliveries of crude to the distillers hit an all time high in the fourth quarter.

EIA forecast assume higher output from non-OPEC nations will continue to drive supply of distillates higher by 2.1 mb/d over the next 6 months. The downside is that demand growth is not expected to keep pace with supply resulting in net deficit for the year. Because of this the EIA says prices for Brent and WTI could decline as much as 10% from current levels, and outlook consistent with the World Bank and IEA’s assessments.

Demand growth for commercial liquids is expected to continue expanding in 2018; 2017 saw total commercial liquids demand increase by 1.4 mb/d, 2018 is expected to see demand grow by 1.6 mb/d.

Gasoline, the most readily available commercial liquid, is expected to see prices remain high in 2018 although the average is expected to fall a bit from 2017 levels. This is expected to curb use of the product, furthering supply imbalances already plaguing a well supplied market.

Saxo Bank Outrageous Predictions For 2018

Saxo Bank like to keep things real with its annual Outrageous Predictions. In the 2018 edition the investment banker says China will roll out trading of a yuan based oil futures contract. The move, Saxxo Bank says, is inevitable as China is the world’s largest importer of oil. Many of its exporting partners are more than happy to do business in terms of yuan and would quickly move to own/sell futures based in the currency. This would come as a blow to the US dollar dominated market and dethrone WTI as the benchmark for price and quality In the new paradigm OPEC crude would be become a new global standard alongside Brent crude.

The Crude Oil Market Analysis Outlook For 2018 Isn’t Terrible, But It’s Not Bullish

The outlook for oil in 2018 isn’t terrible, but it’s not bullish either. Growing demand is there but offset by high and rising supply, a combination that has led to deep price declines in the past.

The problem is prices. High prices are good for the energy market but ultimately self defeating. As prices move higher they will attract more non-OPEC producers to the market, this will  increase available supply faster than demand will grow and result in a continued imbalance within the market. Prices are high now but not on fundamentals which leaves them vulnerable to correction.

higher oil prices

In the nearer term, as in the next month to half a year, we can expect to see prices continue to trend at or near current levels. Later in the year, as fundamental imbalances within the market reassert themselves, prices are expected to decline until they reach a point production begins to slow.

The signs are already there if you look. The IEA says their analysis has led them to believe oil markets will be oversupplied in the 4th quarter of 2017 and 1st quarter of 2018 at least. With oversupply dominating the market, and an expectation of net surplus for next year, there is really no reason for crude to be trading near $57 (WTI) and $63 (Brent) as it is now.

Looking to the charts it is easy to see WTI trading at multi-year highs, well off the lows of last year and extended in a technical sense. The most recent surge higher is driven on geopolitical concern and pipeline outages, catalysts of middling importance and short term effect. When they pass what’s left will be a market fundamentally skewed toward the downside with prices trading near long term highs.

Earnings Outlook In The Energy Sector

The energy sector is expected to post strong gains in earnings growth this year and next. These gains are driven by oil’s slow recovery and expected to continue for the next 3 quarters if oil market analysis is correct. Looking to the S&P 500 energy sector earnings outlook for the next quarter and full year 2017 is robust. Not only that it has been revised higher over the past 2 months as oil prices edged higher. On a quarterly basis earnings are expected to grow by 123% in the 4th quarter of 2017 with full year 2017 growth topping 270%, numbers sure to drive the sector to new highs. The caveat is this; growth is driven by rising oil prices but those gains are likely to be limited in light of crude oil market analysis for the second half of 2018.