$70 a barrel – a false dawn?

$70 a barrel – a false dawn?

With Brent crude hitting $70 bl on 15th January will 2018 see a sustained recovery in the oil price or is it another false dawn for the industry?

The second half of 2017 saw a unexpected surge in the oil price from $47 bl in June to end the year at $67 bl.  Brent crude pushed through the $70 barrier in the second week of the year and has continued to hover in the $68-70 range since. There’s no shortage of opinions on which way the oil price will go next, and consensus remains elusive. We summarise market comments and ask Bill Roberts and Piers Johnson for their thoughts.

 

Going up

Bullish voices point to steady improvement in the fundamentals. Inventories continue to fall and at 419 million barrels, U.S. crude inventories have not been this low since early 2015. Demand also looks strong with OPEC forecasting demand growing at a brisk 1.5 mb/d in 2018.

Production is falling fast in Venezuela and uncertainty over what to expect from the Washington-Tehran confrontation is helping to push up oil. The market is seeing “falling inventories and rising geopolitical risk and that signals higher oil prices,” Rob Thummel, managing director at Tortoise Capital Advisors LLC, told Bloomberg.

Overheated

On the flip side, there are those that argue the rally is overstretched.  Hedge funds and other money managers have amassed a staggering proportion of bullish bets and the dramatic net-length in the futures market has accelerated the price gains, and may have outstripped what is justified based on the market. A short-term price correction is in order if speculators liquidate their overwhelming long positions on crude.  “Seventy dollars is too much,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, according to Bloomberg. “It’s not completely unexpected, given the price momentum. But there will be a reaction in U.S. shale, and OPEC’s strategy will backfire massively.”

Bill Roberts, President, OPC USA

Bill_Roberts_smallI expect a stable to steady increase in the oil price throughout 2018 to around $80 at year end – as long as OPEC and the other major producers keep working together to reduce the overcapacity. One sentiment that is commonly heard is that most of the ‘sweet spots’ have largely been exploited and that additional production will not be as easy to generate, but I would never count out the ingenuity of the engineers who literally got oil out of impervious rock. That being said, the long-term performance of shale reservoirs and the longevity of shale wells is unknown so I wouldn’t count out reserve write-downs as wells underperform.

The Trump administration’s announcement of opening up new licenses everywhere is definitely up for negotiation, and we’re going to see a lot more pushback from states like Florida who will tie up any exploration for years.

Piers Johnson, OPC Managing Director

PierswebGiven my woeful record on forecasting oil price recoveries in previous articles, I’m going for $70 at year end with several fluctuations driven by speculators and political events.  I have had several meetings in the Middle East and their economies need the oil price to stay close to or around $70 to afford the infrastructure projects they have planned.  I then expect prices to spike in 2019 as demand continues to increase and market speculators realise that oil companies have not been investing in exploration and therefore have a gap in new assets coming on stream.

Impact for Upstream expertise and jobs

We are already seeing more confidence in the market  and many oil companies are planning more exploration in 2018.  There has been a virtual halt over the last 3 years and there will be a drop in production (and revenues) unless new assets are brought on stream. There will be increased demand for expertise within geosciences, asset evaluation, reservoir engineering and field development planning.  Unfortunately, many engineers have retired (and there has been a distinct lack of recruitment and training to fill the gap).  That could be good news for geoscientists and engineers still looking for employment – as we have already doubled our staff numbers over the last 3 months and anticipate further increases throughout the year.

What’s you view?  Do you agree with Bill or Piers or neither?!  Feel free to comment below or join the discussion on OPC LinkedIn.

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