Oil analysts see shallow gains as OPEC deal, shale hem in prices
NEW YORK (Bloomberg) -- Wall Street’s optimism on oil prices is muted, following a 75% gain in the past year.
Oil in the U.S. is trading between $50 and $55 after a deal by OPEC and other countries to pump less oil. Analysts see West Texas Intermediate averaging $60/bbl in 2018, according to the median of 30 estimates compiled by Bloomberg, just $5 higher than what they were forecasting a year ago for 2017. According to Barclays, the market faces short-term swings with no major price move.
"The market could be whipsawed more by data and headlines than in the past," Michael Cohen, head of energy commodities research at Barclays in New York said by telephone. "Supply and demand factors are playing a part in the market, that weren’t there before, while the long-term price forecast doesn’t change."
The Organization of Petroleum Exporting Countries agreed to reduce its supplies by 1.2 MMbopd starting this month at a Nov. 30 meeting, while 11 non-members including Russia and Kazakhstan pledged less than two weeks later to curb output by almost 600,000 bopd.
Some of the hesitance in increasing price forecasts is the uncertainty over whether the output cuts will actually occur. As the former Saudi Arabia Oil Minister said about OPEC quotas in December: "We tend to cheat."
"Since OPEC’s Vienna agreement and the follow-up agreement with non-OPEC prices ran up a bit further than expected," Mike Wittner, head of commodities research at Societe Generale SA in New York, said by telephone. "I’m waiting until we actually see cuts before making any changes to the price forecast."
Then there is the excess supply. Almost 1 Bbbl of oil held in inventories must be used up before global supply and demand are closer to balance, Dana Gas PJSJ CEO Patrick Allman-Ward said Tuesday in a Bloomberg TV interview with Francine Lacqua at the World Economic Forum in Davos, Switzerland.
Market Balance
The high level of compliance and rising global demand should balance the market in the first half of the year, Saudi Arabia’s Energy Minister Khalid Al-Falih said in an interview in Davos on Tuesday. OPEC initially suggested it could extend the six-month deal beyond June, yet Al-Falih said Monday there may be no need.
"I don’t think we’ll move above $60," Chip Hodge, who oversees a $12-billion natural-resource bond portfolio as senior managing director at John Hancock in Boston, said by telephone. "We may stay below that level for a while because of high inventories. We’re starting to see declines but it will take a while to cut through them."
The forward curve reflects that flat feeling held by analysts. The difference between December 2017 and December 2018 WTI contracts was 4 cents Wednesday, after swinging between 92 cents and minus $2.72 in the past year.
Shale Output
The other wild card is U.S. shale production. Oil-price gains will trigger a “significant” increase in shale output, according to the head of the International Energy Agency. The Energy Information Administration sees U.S. crude supply rising year-over-year again starting as soon as April. Rig counts reached the highest in a year in January, and Barclays estimates North American drillers will boost capital spending 27% this year.
"The difference from five years ago is that there are more moving parts," Cohen said. "There’s a new, rapid shale response, while not a substitute for spare capacity, still can have a major impact. Subsidies have been removed, so there will be a much bigger reaction to price changes."
U.S. drivers, who are forecast to pay an extra $52 billion to fill their cars with gasoline this year, may not have too much worse to fear than $60 crude.
"Long-term, I think that’s the price that’s needed to make everything work," Hodge said. "It’s not horrific for consumers."
