Is There a Case for $100 Oil in 2018?

Matthew Carr By Matthew Carr
Emerging Trends Strategist, The Oxford Club

Oil & Gas

In January and February of 2016, when oil was trading at a mere $26 per barrel, I told investors to buy.

My thesis was simple, and it’s proven to be successful: Buy low.

At the time, the price of crude was at its lowest level in more than a decade… even lower than what it was during the financial crisis.

Plus, as I said, the idea of $100 per barrel of oil was dead. To double your money, all oil needed to do was go above $52 per barrel.

Today, the price of crude is more than $57 per barrel, up more than 100% from 2016 lows.

Demand is rising. Even more importantly, OPEC, Russia and several other countries joined forces to reduce global output this year in hopes of siphoning off record inventory levels worldwide.

Despite some initial doubts, OPEC’s plan to alleviate the global oil glut worked.

In turn, prices for Brent and U.S. crude are at their highest levels since 2015…

This month, Brent, the international benchmark, went above $64.

That puts the possibility of $100 oil back on the map…

Now the market is asking: Can that actually happen?

Optimists are quick to point out that OPEC and Russia announced an agreement to extend oil cuts through the end of 2018…

And that, for the fourth consecutive month, OPEC increased its expectations for 2018 crude demand.

The cartel is now forecasting that the world will need 33.42 million barrels per day (bpd) of its oil. This is up 360,000 bpd from its last update.

Again, that’s just OPEC crude…

This has been a painful lesson for OPEC in recent years: It’s not the only game in town.

Total global demand for crude in 2018 is projected to be 98.45 million bpd. That’s an increase of more than 1.5 million bpd as world economic growth is projected to accelerate from 3.5% to 3.7%.

These are positives that are buoying oil’s price.

At the same time, in September, global oil inventories fell 40 million barrels. This was the first time in two years that total inventories fell below 3 billion barrels.

I know, that seems like an insurmountable number. But look at how much inventories have fallen this year…

Over the next year, this supply overhang is expected to be eliminated entirely. The world would then move into supply deficit territory…

That would be an enormous turnaround.

Of course, that hinges on U.S. shale producers not flooding the market with cheap crude…

Let’s go ahead and be honest with ourselves… We can pretty much count on that happening.

For 12 consecutive months, U.S. crude output has increased. And right now, the U.S. is producing crude at a record pace of 9.62 million bpd.

At the same time, the price of crude continues to increase. In fact, it’s gained 19.9% since the start of August.

That’s a good sign.

But I need to temper your expectations…

From the start of August 2016 to December 2016 – when OPEC originally announced production cuts – U.S. crude gained 20.1%. The price went from $44.70 per barrel to $53.72.

That’s similar to what we’ve seen this year…

For 2017, the price of crude is up only 6.8%. Meanwhile, it’s up just under 20% since August.

And these gains have more to do with political turmoil in the Middle East – Saudi Arabia’s “corruption” roundup, missiles fired from Yemen, etc. – than OPEC’s production cuts…

We can’t forget that Hurricane Harvey shuttered U.S. refining capacity. This is among the largest reasons for global crude inventories falling in September.

Looking ahead, we have a surplus of 600,000 bpd in the first quarter of 2018, which then shrinks to 200,000 bpd in the second quarter. And since OPEC will continue production cuts through the end of next year, we should see a supply deficit in the last half of 2018.

The truth is, $100 crude is closer than it was a year ago. But I don’t think it’s any more probable…

Not unless we see another major supply disruption. Then all bets are off.

Good investing,

Matthew