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Friday / December 14.

Oil price forecasting a futile affair

Forecasting the oil market has always been fraught with uncertainties and even more so these days. Two months ago no one predicted prices to rise beyond what they were at that time.

The average October 2017 prices were $55.50 (Dh203.85) and $57.28 for the Opec Basket and Brent, respectively, and the average 2017 prices were $52.51 and $54.25. The prevailing wisdom at the time was that prices would stay within the $55-$60 range.

However, the market anticipated — rather demanded — the Opec and non-Opec agreement of reducing production by 1.8 million barrels a day (mbd) to be extended to the end of 2018. As I said in a previous column “The Brent price just before the [Opec and non-Opec] meeting was about $62 and the day after rose to almost $64.50 before settling at $63.70. The market has taken the agreement in stride and priced it in. Therefore, analysts do not expect prices to appreciate much further.”

But in the last month or so, prices have been rising and as I write the Opec Basket is at $67.38 and Brent at $69.16 and the earlier expected range forgotten.

In a recent survey by Reuters where over 1,000 market participants responded, the now expected range is “around $60 to $70 per barrel through the end of the decade” and that the range would widen to $60-$80 by 2020.

Reuters said that within the survey 5 per cent of respondents believed prices could fall back to the old range and a similar number believed prices can go higher than the new range. But the Reuters average is not shared by the US Energy Information Administration (EIA) and in its latest report predicts prices of WTI to average $55.33 and $57.43 a barrel in 2018 and 2019, respectively. The EIA attributes this to increasing global crude oil production.

Perhaps the International Energy Agency (IEA) implicitly points in the same direction when it said in its December ‘Oil Market Report’,

“On our current outlook 2018 may not necessarily be a happy new year for those who would like to see a tighter market.”

It implies that supply growth may be higher than that of demand, especially in the first-half of 2018. However, the IEA adds, “A lot could change in the next few months but it looks as if the producers’ hopes for a happy New Year with de-stocking continuing into 2018 at the same 500 kb/d pace we have seen in 2017 may not be fulfilled.”

This is not in any way undermining the Opec and non-Opec Declaration of Cooperation, but simply saying that the objective of reducing oil stocks to the last average five years’ level may take longer than previously thought. The declaration has been most instrumental in increasing oil prices in 2017 over 2016 by 29 and 24 per cent for Opec and Brent respectively.

It has also removed a large chunk of the commercial stock overhang, especially in the OECD. More importantly, the compliance by the declaration is 91 per cent in 2017 as a whole, something unprecedented in producers’ agreements.

The recent surge in prices may not last and if it does may not be in the long-term interest of Opec and its associates as it will spur a new wave of increased production, not only in shale but in oil sands and deepwater oilfields.

A “perfect storm of events” is behind the price appreciation such as “cold weather in North America, unrest in Iran, strong economic growth and technical buying from hedge funds and other money managers”. Add to that the shutdown of a 0.4 mbd pipeline in the North Sea and a reduction of 0.29 mbd in US crude oil production in the last few days of 2017 and first week of 2018.

All these factors are transient and Barclays says that the market remains “skewed to the downside from here as fundamentals on the horizon suggest a reversal is in order”.

We do not know if the US reduction is a blip or a sign of shale producers’ recent signals of prudence as most analysts agree that US production will increase by close to 1 mbd in 2018. Given the modest demand growth, it is said that prices may head south again and the battle for market share with shale producers would continue.

But the correction may not be a sudden decline in prices, but gradual as so many factors outside of fundamentals persist. There is so much to watch in this oil market.

Saadallah Al Fathi is former head of the Energy Studies Department at the Opec Secretariat in Vienna.

via GN