Two things are certain in 2018 in the oil markets. In June, OPEC will convene in Vienna where it will announce that the global oil markets are almost in balance, outlining an exit strategy where the 14 country block and the Russia-led NOPEC block will eliminate strict targets but agree to a rough cap for total production. By December 2018, there will be no restrictions beyond market forces on the supply side. After agreeing to limit itself for the good of the market for more than two years, major OPEC countries will be eager to unshackle themselves for a variety of reasons – Saudi Arabia has the Aramco IPO to worry about, Iraq wants to make up for lost time, Iran needs to circumvent American sanctions, Venezuela is at risk of default, while Nigeria desperately needs to restructure its economy.
The wildcard in this scenario is US shale producers. It was thought that many would rush in the fill the gap left by OPEC this year. That has happened to some extent – crude from Eagle Ford and the Permian has made it far and wide, from South Korea to Sweden, some destinations for the very first time – but the wave has been smaller than thought. Burnt by the last time they unrestrainedly raised output, American shale producers are focusing more on optimisation and returning value to shareholders this time round, as crude oil prices went north of US$55/b and have been staying steady there. The wave, however, will slowly rise. US crude production is expected by the EIA to rise to rise to 9.9 mmb/d, rising from 9.3 mmb/d in 2017, which was already a record high.
So OPEC is backing off and American producers are cautiously raising production. What does this mean for prices? A look at the futures markets indicate some bullishness, with the net long positions rising. Supporting this is the growth in global oil demand – which is expected to be solid if unspectacular in 2018, but enough to support average crude prices of US$60/b. Recent wounds should prevent oil from falling below US$50/b, as drillers and explorers value caution over aggression. The main variable is US shale production. Some predict a 2018 increase of as much as 1.3 mmb/d, while the more careful, like the IEA, think growth will be closer to 800 kb/d. There is reason to believe that diminishing returns could be kicking in technological in America's major shale basins, but there is still a lot of room to grow. Exactly how much it grows will be the major variable for prices. That's difficult to predict; as shale producers are too numerous to predict collectively. But this much is certain - in 2018, the value of oil will not be decided in Vienna, but in Texas.
Key oil forecasts for 2018
OPEC crude production: 32.7 mmb/d
USA crude production: 10 mmb/d
Total global crude production: 101.5 mmb/d
Average crude prices 2018: US$60-65/b
Major downside risks: Faster-than-expected US shale/crude output; Premature end of OPEC/NOPEC supply freeze before market rebalances
Major upside factors: Faster-than-expected global economic growth; Output disruption in Iraq, Venezuela and North Africa
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