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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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The Bullish And Bearish Case For Oil

Anadarko drilling rig

Oil prices are in a holding pattern as we await the outcome of the OPEC+ meeting in a few days, and while the result of that meeting will almost completely control the direction of oil prices in the near-term, there is a bit of disagreement among analysts over the bigger picture in regards to the trajectory of oil prices going forward.

So, let’s take a look at two different outlooks, one bearish and the other bullish.

The bearish case

Oil prices have fallen back from $80 per barrel, the direct result of the market recalibrating to the likelihood of higher OPEC+ production in the second half of the year. Indeed, the single largest factor that could push prices down going forward would be a sizable increase in OPEC+ supply.

However, OPEC and Russia are not the only factors at play. A few other factors could help keep a lid on oil prices over the next year or so.

The first thing that comes to mind is soaring U.S. shale supply. The U.S. has added somewhere around 800,000 bpd since the start of the year, a staggering sum. Infrastructure constraints in the Permian are real, but so far they have not slowed down output. The EIA sees the U.S. adding another 80,000 bpd in June from a month earlier. In 2018, the U.S. could average 10.8 mb/d, but it won’t stop there. The EIA sees production skyrocketing by 1 mb/d to an average of 11.8 mb/d next year.

The bottom line is that the International Energy Agency expects oil demand to grow by 1.4 mb/d this year, but non-OPEC supply (mostly U.S. shale) will grow by 2 mb/d. Next year, the story is the same: demand grows by another 1.4 mb/d, and non-OPEC supply will grow by 1.7 mb/d. These numbers suggest that the U.S. and a handful of other non-OPEC countries will more than meet global demand.

Those numbers by themselves are sobering. Once you add in another 1 mb/d of potential OPEC+ production, the market starts to look well-supplied through next year. “While geopolitical tensions and lingering risks of large supply disruptions remain an upside risk through 2H18, we think that prices will be corrected downwards towards end of the year and remain capped in 2019,” JP Morgan wrote in a note. Related: Saudi Arabia: Deal To Gradually Ease Cuts Is ‘Inevitable’

There are also some risks to demand, not least of which is the recent run up in prices (the IEA revised down its demand figure in May by 100,000 bpd because of higher prices). The possibility of an economic slowdown, possibly from emerging markets, could weigh on demand growth. The past few months has seen currency upheaval in Argentina, Turkey and Brazil, among other places. Argentina just sought an IMF bailout and Brazil was temporarily crippled by nationwide strikes, spurred on by high fuel prices.

The U.S. Federal Reserve is hiking interest rates, which is putting pressure on indebted countries, making debt harder to pay off, particularly as their currencies weaken relative to the dollar. This is by no means a foregone conclusion, but an economic downturn could cut into demand. Bank of America Merrill Lynch said that it is conceivable that oil drops to $60 per barrel in 2019 because of emerging market dangers.

The bullish case

The case for higher oil prices is a bit more obvious. Global inventories are already back to their five-year average. OPEC+ has kept more than 1.8 mb/d of supply off of the market for the better part of 18 months.

But the outlook for higher oil prices comes down to the severe production outages in several places, with Venezuela front and center. The South American nation has already lost 350,000 bpd this year, and the declines are accelerating. Operations at PDVSA’s refineries and storage facilities in the Caribbean have been disrupted by ConocoPhillips, and the facilities in Venezuela are buckling under decrepit conditions.

Upgraders are being shut down and production – already in decline – will have to be curtailed because there isn’t enough storage, and in any event, the ports can’t handle the export volumes that PDVSA has promised its customers. That could lead to a declaration of force majeure. Ultimately, Venezuela’s production, which averaged 1.39 mb/d in May, is rapidly heading down to the psychologically important threshold of 1 mb/d. Who knows if it will stop there.

But supply disruptions loom elsewhere. Iran could lose 500,000 to 1 mb/d because of U.S. sanctions, although that scenario is subject to a great deal of uncertainty.

Meanwhile, Bloomberg reports that two of Libya’s largest oil ports stopped loading oil this week because of clashes between rival groups. Years ago, instability and civil war knocked off much of Libya’s output. That has since been restored to around 1 mb/d, essentially double the levels from a year ago. But the latest clashes are a reminder that Libya’s output cannot be assumed.

Nigeria is also seeing lower exports because a key pipeline has been shuttered. Reuters estimates that Nigeria’s oil exports could plunge from just under 1.8 mb/d in June to just 1.43 mb/d in July. Force majeure on Bonny Light remains in place. Related: Iran Warns North Korea About The United States

OPEC+ will likely increase output, but higher production might not even offset these outages. A modest increase from Saudi Arabia and Russia might be swamped by major disruptions, especially if they occur all at once.


The only thing preventing oil from going to $100 per barrel or higher is the prospect of a wave of U.S. shale. Indeed, the forecasts are impressive, but what if U.S. shale can’t live up to the hype? For at least the next year or so, pipeline bottlenecks in the Permian could restrain production growth. The Permian pipelines are essentially filled to the brim, and discounts for Midland crude are painfully large. It is unclear how this will play out, but if U.S. shale undershoots, the oil market could find itself short on oil.

That becomes a serious problem when OPEC uses up a lot of its spare capacity. Raising output now could keep the market well-supplied, but it comes at the expense of spare capacity, which could drop to dangerously low levels over the next year.

“Now it’s getting interesting,” hedge fund manager Pierre Andurand told the Wall Street Journal earlier this month. “We are in the middle of a multiyear bull run,” he said. “We could see $100 oil this year…$150-plus in 2020-2021.”

By Nick Cunningham of Oilprice.com

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  • Sean Yun on June 14 2018 said:
    Long story, short, the benchmark oil prices ( WTI, Brent, and Dubai) do not move based on demand and production since 3rd Q of 2003yr.

    The oil prices are moving up and down, fluctuating based on interest rate of the central banks in the world, currency rate, and stocks market's movement. Indeed the most important factors are Interest rate and currency.

    As a matter of fact, everywhere in the world is being glutted with oil supplying esp in Asian countries such as China, S.Korea, Japan, Taiwan, Vietnam, and so on. That is the reason, Chinese refiners never complain to the notorious oil producers such as Iran and Venezuela, even if its tankers are waiting for loading the oils at the ports of Iran and Venezuela even more than 10days, occurred huge demurrage.

    The most important factor is again currency rate at this moment since the Fed hiked its rate by 25bp, means that the US$ how to deal with those Asian currencies esp Yuan, Won, Yen.

    Based on my Math, the benchmark oil price WTI will be getting into the level of 70-80$ soon, based on weak US$ against the Asian currencies mentioned above.

    After WTI getting into the level of 70-80$ bb/l, the range will be remained until the end of Trump Era, it might be 2024yr.
  • Mamdouh G Salameh on June 15 2018 said:
    There are flaws in both the bearish and bullish cases for oil in that they are both based on shaky assumptions.

    For the bearish case, the first shaky assumption is the impact of US shale oil supply. Even if we accept the hyped figure of 10.8 million barrels a day (mbd) for US oil output, this doesn’t translate into a major addition to global oil supply as only 1.5 mbd are exported and sold not as a crude but to refineries for blending with heavier crudes thus adding no new oil supply.

    However, the claims by the EIA of continued rise in US oil production put us in a conundrum. If US oil production is so high, how come the United States continues to import 7-8 mbd. Moreover, why does President Trump need OPEC to replace any shortfall of Iran’s oil exports. Why doesn’t he use the so-called rising US oil production to stabilize oil prices rather than ask OPEC.

    The second shaky assumption in the bearish case is projections by the IEA of global oil demand. The IEA has reduced global oil demand growth by 100,000 barrels a day (b/d) in 2018 to 1.4 mbd when OPEC is projecting 1.6 mbd this year and 1.7 mbd in 2019. The IEA represents the major oil consumers in the world (mostly western) and therefore it has vested interests in producing projections aimed at depressing oil prices. When it comes to the integrity of projections, I would take OPEC’s any time of the day.

    The bullish case is based on three assumptions. One is continued decline in oil production in Venezuela and Libya and also Nigeria. But the global oil market has already factored in these declines. The second assumption is that the glut in the market has been totally eliminated. This is not the case otherwise oil prices would have surged far beyond $80 a barrel. The third assumption is that Iran could lose 500,000 b/d because of US sanctions.

    Iran will not lose a single barrel of its oil exports as a result of US forthcoming sanctions for two reasons. One is that the European Union (EU) has already indicated that it will stay in the Iran nuclear deal and will not comply with US sanctions and will, therefore, continue to import Iranian oil. The second reason is that Iran will be using the petro-yuan for its oil exports to China, the euro for its exports to the EU and barter trade with Turkey, Russia and India virtually neutralizing US sanctions.

    Oil prices will continue to be underpinned by positive fundamentals in the global oil market.

    On the basis of the above analysis, I see no justification yet for gradually rolling back some of the production cuts that have been in place since January 2017 as Saudi Arabia’s oil minister, Mr Khalid al-Falih is suggesting. The real reason behind the Saudi minister’s statement is the request by President Trump to Saudi Arabia to ramp up oil production to replace any shortfall in Iranian oil exports as a result of the forthcoming US sanctions.

    History is replete of examples of Saudi appeasement of the United States by quenching its addiction to oil, financing its wars and doing the United States' bidding.

    By acceding to President Trump’s request, Saudi Arabia will be risking unravelling the OPEC deal that has brought an end to the glut in the global oil market and pushed on prices to $80 and also inflicting huge damage again on its own economy.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • citymoments on June 15 2018 said:
    With all due respects to the author, I would like to kindly ask him a simple question regarding the condition under which US shale oil producers can further increase their production in the near future: Increasing E&P production requires increasing capital investments, where are the source of capital investments coming from ? There are only two: the first one, it can be obtained from the increasing free cash flows from those shale oil producers which requires further higher oil price, unless the oil price firms up, otherwise this source will be impossible to fund further production increase; the second source is the equity prices of those shale oil producers must be on the further rise. Some of those shale oil equities have recovered, their prices are still very low in historical term, though without the oil prices firms up in the near future, no investors will be interested to allocate more capital in oil sector. In summery, only high oil equity price will be able to create a situation where most oil producers can possibly significantly increase their current production to alleviate the tight oil market.

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