Oil prices in 2018: It’s all about US shale output


NEW YORK • The direction of oil prices in 2018 will be decided in Texas.

Crude oil production out of the US is expected to hit record levels next year, buoyed in part by OPEC supply curbs that have put a floor under prices.

For analysts forecasting prices next year, there are two key questions: Exactly how far American production grows and whether the global economy is strong enough to swallow those extra barrels? Brent crude is expected to average US$60 (RM244.80) a barrel in 2018, while its US counterpart is seen at about US$55 a barrel, according to the median estimate of 27 analysts surveyed by Bloomberg.

That’s below where oil prices sit now — currently near US$64 a barrel for Brent and close to US$58 for West Texas Intermediate (WTI).

Around those averages forecasts vary considerably — ABN Amro Bank NV is ultra-bullish while Citigroup Inc and BNP Paribas SA fall on the more bearish end of the spectrum.

“A lot of the divergence that you’ll find between the analysts that do their balances really pertains to this US production growth figure,” said Harry Tchilinguirian, head of commodity markets strategy at BNP in London, who forecasts Brent will average US$55 a barrel in 2018.

“We are very optimistic on US shale supply growth next year and this optimism is essentially fuelled by the extensive hedging that occurred in 2017 for 2018.”

Supply cuts from the OPEC and its allies finally began to crimp global supplies in the second half of 2017.

While that’s translated into higher prices, it has also been a boon to oil producers in North America, who have been able to lock in prices for supplies going forward, giving the financial certainty to invest in drilling.

Hedging Wave
The net-short position of swap dealers, an indication of hedging, increased for a ninth week to a fresh record-high, according to the latest data from the US Commodity Futures Trading Commission.

Producers have found it optimal to lock in rates with oil prices hitting the highest levels in two years during the fourth quarter (4Q).

In a Bloomberg New Energy Finance survey of 53 North American drillers, producers had contracts in place for next year’s crude production at an average price of US$48.95 a barrel as of the 3Q.

There’s a “risk to the upside based on what we think will end up as a record amount of hedging activity year on year,” said Ed Morse, head of commodity research at Citigroup.

“That gives rise to the view that if we’re wrong on the supply side, we’re understating it.”

The Energy Information Administration said US crude production will surpass 10 million barrels a day next year, a record, while the International Energy Agency (IEA) bolstered forecasts for growth in supplies outside OPEC next year by 200,000 barrels a day.

Growth in supplies from outside OPEC may exceed the rise in global oil consumption next year, the IEA said.

Bull Camp
While a number of analysts expect US shale to meet the rise in global demand next year, ABN Amro — the most bullish on Brent and WTI forecasts in the survey — only sees shale output increasing by around 700,000 to 800,000 barrels a day.

Any more will be “challenging” due to rising production and financing costs, according to Hans van Cleef, a senior energy economist at ABN, which predicts Brent will average US$70 next year.

“The overall US production number has been increasing, but if you look at separate basins like the Bakken, they have struggled to increase production,” van Cleef said.

On the other hand, exploration and production companies’ “tendency toward growth could eclipse the narrative of marrying disciplined spending with a controlled pace of production and capital repatriation, further delaying recovery,” according to research by Bloomberg Intelligence analysts.

As well as shale growth, demand will be key — and that depends chiefly on the continued health of the global economy.

Kuwait’s new Oil Minister Bakheet Al Rashidi expects “healthy” crude demand next year, and sees consumption growing by 1.5 million barrels a day next year.

That’s in line with how JPMorgan Chase & Co sees demand playing out in 2018.

The bank forecasts WTI at US$54.88 next year and Brent at US$60, the median of Bloomberg’s survey.

WTI traded at US$57.75 a barrel and Brent at US$63.80 at 11:32am in London yesterday.

“We have in our assumptions taken very high levels of growth for the US,” said Abhishek Deshpande, head of oil markets research at JPMorgan Chase, referring to supply growth.

“Despite that growth, if demand growth were not to surprise to the downside then we are quite comfortable in saying markets will be well balanced given OPEC’s continued support of cuts into 2018.”