Oil Prices Near Two-Year High, But for How Long?
West Texas Intermediate is trading near a two-year high at $54.00 per barrel, as the Organization of the Petroleum Exporting Countries (OPEC), and other-major non-OPEC oil producers (minus the U.S. and Canada) says it will stick with its intended production cuts through 2018.
This has resulted in 1.8 million barrels of oil being removed from the market. Oil bulls have responded by sending oil prices higher. But are oil bulls being a little premature with their optimism?
Despite the recent strength in oil prices, many expect crude to hit a ceiling in 2018 at around $60 per barrel. Even that might be a little high. Mexico locked in an average price of $46 per barrel for 2018.1 This is significant; the Mexican oil hedge is one of the biggest hedging bets on Wall Street.
Meanwhile, in the U.S., roughly two-thirds of American oil and gas executives expect oil prices to trade between $40 and $50 per barrel in 2018.2 Only two percent of oil and gas executives think oil prices will breach the $60 mark in 2018. Last year at this time, 55% said oil would top $60.
It’s not just oil and gas companies that are worried. Credit Suisse (NYSE/CS) thinks oil prices will remain below $60 per barrel until at least 2020.3 Morgan Stanley (NYSE/MS) downgraded its outlook for crude in 2020 to just $60 (from $70-$75 per barrel).4
Why are those outside OPEC not as bullish on oil prices in 2018? Drilling in the U.S. has undermined any meaningful production cuts. On top of that, slow economic growth in emerging markets, including China, is helping keep a lid on oil and other commodity prices. This should carry into 2018. Oil prices look solid, but the world is still awash with crude and U.S. production remains high.
The rise of renewable energy (wind, solar) and the global adoption of electric vehicles should also have a detrimental effect on oil prices in 2018. Some even predict electric vehicles and alternative fuel have the potential to send oil prices crumbling to just $10 per barrel by 2023.5 It’s entirely possible, especially when you consider roughly 70% of oil is used for transportation.
Now, 2023 might seem like a long ways away, but the fact is, oil isn’t going to just tumble overnight; it’s going to be a drawn-out affair. And it appears that even those in the oil and gas industry see interest in crude oil waning in 2018.
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- Slav, I. “Mexico Locks In $46 Per Barrel In 2018 Oil Hedge,” Oilprices.com, October 17, 2017; https://oilprice.com/Energy/Oil-Prices/Mexico-Locks-In-46-Per-Barrel-In-2018-Oil-Hedge.html
- Hussain, Y. “U.S. oil industry fears more job losses in 2018, with prices stuck in US$40-US$50 range: survey,” Financial Post, October 12, 2017; http://business.financialpost.com/commodities/energy/u-s-oil-industry-fears-more-job-losses-in-2018-with-prices-stuck-in-us40-us50-range-survey
- DiChristopher, T. “Oil prices will be stuck below $60 through 2020, Credit Suisse forecasts,” CNBC, July 24, 2017; https://www.cnbc.com/2017/07/24/oil-prices-below-60-through-2020.html
- Cunningham, T. “4 Wildly Different Oil Price Scenarios For 2020,” oilprice.com, May 30, 2017; https://oilprice.com/Energy/Oil-Prices/4-Wildly-Different-Oil-Price-Scenarios-For-2020.html
- Paraskova, T. “Mass EV Adoption Could Lead To $10 Oil,” oilprice.com, October 13, 2017; https://oilprice.com/Energy/Oil-Prices/Mass-EV-Adoption-Could-Lead-To-10-Oil.html
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