For the U.S. oil industry, 2017 ended with a comparative bang. Oil prices closed out 2017 at $60.07 per barrel, the highest close since June 2015 ($60.32), as buyers capitalized on surprise drops in both output and commercial crude stocks. Since mid-2017, U.S. West Texas Intermediate (“WTI”) crude prices rose 50%, with an overall increase of 12% for the full year.
In 2018, we expect to see continued, gradual oil price increases, an overall growth in production and export, inventory declines and continued federal public policy support. As we head into the new year, let’s examine the events that swayed 2017 crude prices and summarize what analysts predict for the next 12 months.
Key Events Affecting 2017 Oil Prices
Oil markets saw a rocky first half of 2017, with prices finally gaining traction mid-year. Hart Energy and Stratas Advisors prepared an interesting look back at some of the events responsible for last year’s oil price path.
- OPEC/non-OPEC allies announce production cuts (November 2016).
- EIA Weekly Petroleum Status Report mentions hefty U.S. crude builds, traders unwind long positions.
- U.S. weekly data reveals rebalancing and OPEC compliance.
- Refinery maintenance lowers crude runs, brings stock builds.
- Maintenance ends, crude draws resume.
- Markets expect OPEC will deepen cuts to speed re-balancing.
- OPEC does not deepen cuts, traders act on falling costs, rising supply.
- High refined product demand, high refinery runs, resumed crude draws. OPEC compliance continues.
- Hurricane Harvey damages U.S. Gulf Coast. Quick recovery.
- OPEC extends production cuts through December 2018. Caps Libyan and Nigerian production.
2018 Oil Market: What to Expect
OPEC production cuts (and potential exit), U.S. shale production levels, stock surplus concentrations, and continued favorable federal public policy are likely to have the largest effect on oil prices over the next 12 months.
OPEC cuts compliance and exit plans
OPEC’s compliance rate with production cuts is at 115%, a good sign that they plan to stick with the agreement moving into 2018. We still remain cautious; however, higher oil prices resulting from a rebalanced oil market (or a sudden price drop) could persuade them to stray from the agreement.
If surplus dwindles, OPEC may begin to discuss an exit strategy at its June 2018 meeting. Even a gradual return to OPEC production will affect the actions of cautious traders.
Increased U.S. shale output
The increase in drilling permit applications seen in late 2017 suggests that upstream drilling budgets will increase early this year. But if investors continue to push for stronger returns, drilling increases will likely progress at a slow pace.
How quickly the market rebalances will largely depend on whether U.S. shale output will indeed meet IEA and OPEC predictions, which estimate 2018 U.S. shale output to increase by 870,000 bpd and one mb/d, respectively.
OECD commercial inventories
OPEC compliance and exit plans will depend on stock surplus, which may or may not be eliminated in 2018. While current stock surplus is at just 100 million barrels above the five-year average, down 66% from early-2017, IEA predicts stocks will increase by 200,000 bpd in the first half of 2018.
Favorable federal public policy
The President's American Energy Dominance agenda and a continued trend in positive federal public policy will continue to impact U.S. shale production and export. The U.S. Energy Information Administration (EIA) projects exports of domestic crude will double by 2020.
Of course, unexpected supply disruptions are bound to occur and could bring sudden price increases throughout 2018, like the recent U.S. Keystone pipeline spill and the Forties pipeline crack and shut down. Other, more predictable events that may sway prices in 2018 include potential supply outages in Nigeria and Libya and the output declines coming out of Venezuela.
As long as OPEC export limit compliance continues and the U.S. increases drilling at a gradual pace, crude prices should continue to rise through the new year. The U.S. oil industry is holding a powerful position heading into 2018, and we are excited to watch its progress. Happy New Year!