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The Unsustainable $60 Oil Spike In 2017

Oil Barrels

An eventful year for oil is coming to an end. During the year, crude oil sank to depths unseen since 2003, but recovered nicely to above $52 per barrel by December. We saw OPEC hammer out a deal to cut production, another first in eight years, and non-OPEC nations like Russia also pitched in with their contribution to a production cut.

Will 2017 also be another year of ups and downs, or does the picture for next year look much better for the oil bulls? Let’s analyze.

EIA projections

The latest Short-Term Energy Outlook released on December 6, forecasts Brent to average $52 a barrel and WTI to average $51 a barrel in 2017. While the EIA expects both Brent and WTI to average $50 a barrel during the first half of 2017, the second half is likely to see higher oil prices of $55 a barrel.

Global inventory builds are likely to average 0.4 million bpd for 2017, with the first half showing higher builds at 0.8 million bpd.

As far as total world production and consumption is concerned, the EIA forecasts 97.42 million barrels per day in production, whereas demand is forecast to be 96.99 million barrels per day.

OPEC crude oil production is likely to be 33.2 million bpd in 2017. Nigeria continues to struggle due to militant attacks, and similarly, Libya is also held back by tribal militia infighting. Related: Oil Traders See Market Balance By Mid-2017

Global oil demand is expected to increase by 1.6 million bpd in 2017, and the real oil-weighted world GDP growth is expected to be 2.7 percent in 2017. An increase in demand has been factored in considering the strong PMI numbers in India, China, Europe and the U.S., which indicates increased oil demand.

What are the risks to higher oil prices?

There are a few risks, which we believe will limit the rally in crude oil prices.

1. Though the OPEC nations will follow up on their promise to cut production in the first two or three months of 2017, they are unlikely to continue any further. The fiscal situation in the oil producing nations cannot sustain any decrease in revenues, as most are reeling under the pressure of low oil prices.

2. Higher oil prices will revive the shale oil industry in the U.S., which will attempt to increase its exports into new markets, thereby threatening to enter markets previously dominated by the middle east nations. As this is a real threat, OPEC members will start pumping frantically so as to not lose their hard-earned market share.

3. Demand growth from China and India might not be as supportive as 2016. While India is dealing with the demons of demonetization, China has tightened the regulations on its teapot refiners and its storage facilities are filling up. Both these events are likely to reduce demand growth from the two major nations guzzling crude oil.

4. A stronger dollar, as expected by most analysts, will also curb demand. If the U.S. resorts to trade protectionism, it is likely to start trade wars, thereby threatening the global recovery, leading to lower oil demand.

However, in the first quarter, we expect crude oil prices to trade higher to $60 a barrel, as news of the OPEC nations maintaining their quotas will provide a temporary boost. These higher levels are unlikely to be sustained, though.

What do the charts suggest?

(Click to enlarge) Related: 10 Energy Surprises In 2017

The crude oil chart shows an ascending triangle pattern, which is bullish in nature. Though crude oil prices broke out to the upside, there has been little follow-up buying. However, at times, breakouts are unsuccessful during the first attempt. After some consolidation, another attempt is made, which can lead to higher oil prices, which we believe will happen in the first quarter of 2017.

However, $61 is a strong resistance, which is unlikely to be scaled. Higher oil prices will accelerate the shale oil recovery and entice nations like Libya, Iran and Nigeria to ramp up production. Following this, we expect prices to correct in the second quarter onward.

On the downside, the floor for crude oil prices is $52, $44 and $36 per barrel levels. After the initial jump, crude is likely to trade below $52 a barrel for most of the second half of 2017.

By Rakesh Upadhyay for Oilprice.com

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  • Tesla on December 26 2016 said:
    Almost everyone seems to assume US shale oil reserve is unlimited. No matter how much we produce, it seems the reserve never depletes. Has anyone studied how long we can produce shale oil at current production rate? How long will it take before shale oil in the US is exhausted? It's dangerous when people claim something is infinite.
  • Craig Ferrell on December 26 2016 said:
    A Bloomberg article today amplifies my point on shale response timing...

    "As prices rise, costs may rebound as oilfield service companies seek to rebuild in better times. The result: OPEC’s biggest rivals could struggle to revive output quickly enough to disrupt the re-balancing of the oil market, according to Wittner.

    “It’s going to take them a while to gear up,” Wittner said. “The investment’s got to gather pace, the drillers and the fracking contractors also need time. It’s a gradual process.”

    Which suggests 2017 may not be the crunch time many expect."
  • Bud on December 26 2016 said:
    That's a lot of ifs. Hear is a few more. If wti crude can go from 120 to 26 in 20 months, a 10 dollar sustained move is not a leap and insured if an import tariff is imposed by Trump. Companies are still going bankrupt and the 200 rigs will be needed just to keep production at current levels plus or minus a few 100k. Libya could add a few 100 k in a week. That is the real issue for the Saudis as it is a foregone conclusion that trump will want the full time 100k a year jobs back that Barack traded for waiters.
  • Dan on December 27 2016 said:
    In the U.S. expect record summer driving season and an uptick in construction in 2017. Already we see an increase in shoppers for the holidays. India population growth continues to climb but is hampered by insane war on cash through the failure of its centralized monetary control as are all contries. Gold is the global currency and needs to come out of the control of Western oligarch banks.
  • avenger426 on December 27 2016 said:
    High oil destroys economys, basic economics. For some reason people keep thinking shale will dry up or die, both are wrong. There is enough shale oil to supply the US for 100 years with out anyone changing habits.
    Cars and trucks are a huge driver of oil and both are transitioning to hybrid and batteries. Keep raising the oul price and all alternative energy sources continue to drop in price. Big oil is working on causing it's own extinction. Oil as a feed stock is being replaced by alternatives. Crank up the price and hasten your own extinction big oil. The sooner, the better.
  • As0510 on December 27 2016 said:
    Love to see the day when alternatives take over, what's the environmental and overall cost to manufacture and "properly" dispose of alternatives?? Such as hybrids and batterys?? Where does so called alternative Electricity get generated? What products are used to power generators? What kind of materials are in electric/hybrid vehicals? What is the process in which said materials are made? What products are required to make said materials? I've never heard of a hybrid truck? It's not possible to have one that even would be economical to use as a truck is used with electricity powering it's drive train. I think we need alteratives...... but at what economic and environmental cost? I am positive what we currently have is in no way "bad" by any means in reality.
  • aj on December 29 2016 said:
    It only points out one side of the story. It is more of ifs and buts! What about the depletion of oil estimated at 8% per annum. Trillions of dollars of new investment in exploration and development has been canceled or kept on hold. What about the RPR ratio that is going to change the dynamics of the oil and gas industry.
    The reserves are getting depleted and with the lack of new investment in Exploration and production will hit the bottom-lines. The low cost fossil fuels hamper the renewable sources R&D as well make them less economic viable.

    Agree to an extent that we might not see 120 dollars per barrel but price range of 55 to 60 for WTI is sustainable throughout 2017.
  • Alfred James on January 01 2017 said:
    I am a geologist with 64 years experience in oil and gas. There are two very large factors in predicting shale oil and gas. They are profitability and permeability. Profitability: horizontally drilled, fracked wells cost roughly five times as much as conventional vertically drilled wells; very many will never produce and sell five times as much oil per well, and are financed largely by large debt, with currently rising interest rates. Permeability: is a measure of the inherent ability, or in this case inability, of the host rock (mainly shale) to flow its oil into production. This permeability is very low in shales, far lower than with conventional production, hence the need for long horizontals to increase shale exposure and big fracs to create artificial permeability. Result is mostly that the induced fractures will produce their oil and the great majority of oil remains in the impermeable shale. The usual result is very rapid decline and lots of red ink. Alfred James
  • Victoria Guiroy on January 18 2017 said:
    We are not the only people concerned about the level of speculation. On the impact of financial markets on the price of oil, one point that was emphasized was the role of regulation.
    Therefore, in seeking to assess the prospects for oil prices in 2017, we all need to recognize that oil companies are operating smoothly and have increase returns. All parties should act where they can in seeking to achieve sustainable order and stability in the oil market, with fair and reasonable prices, and encourage others to do the same. Above all, something must be done to reduce the damaging hold speculation has over price levels and stability.

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