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Robert Rapier

Robert Rapier

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2018 Was A Record Breaking Year For Energy Markets

I had intended to grade my 2018 energy predictions before now, but one of them wasn’t decided until the last day of the year. But after the stock market closed on December 31st, I was finally able to grade the five energy predictions I made at the beginning of the year.

I was correct on four predictions, and barely missed on the fifth. Here are the details.

  1. The U.S. will break its all-time oil production record

In October and November of 1970, monthly U.S. oil production exceeded 10 million barrels per day (BPD) for the first time. In the next 47 years, monthly production never again reached that level. But that record has now fallen.

Funny enough, the record had already been broken when I made this prediction, it just hadn’t been announced yet. Early in 2018, the Energy Information Administration (EIA) announced that the previous monthly record for U.S. crude oil production – 10.044 million BPD set in November 1970 — had been broken. U.S. oil production continued to rise steadily throughout 2018, reaching 11.475 million BPD by September 2018 (the last month for which monthly numbers are available).

Weekly production reached 11.7 million BPD by late December. I also said that I believed the previous annual record, 9.637 million BPD, would fall. We won’t know the final numbers for a couple of months, but weekly production numbers have averaged 10.8 million BPD through mid-December. So the annual record will fall when the final numbers are posted.

  1. Oil prices to reach $70/bbl

The price of oil opened the year at $60/bbl, after recovering from the ~$40/bbl level in 2017. In early 2018 there were plenty of people predicting that prices would fall, but I predicted prices would reach $70 a barrel (bbl) in 2018.

There were several reasons I expected oil prices to rise. The threat of sanctions on Iran, global demand that continues to rise, and the deteriorating situation in Venezuela were just three of the reasons I predicted higher oil prices. Related: Oil Enters Bull Market As Shorts Are Wiped Out

The price of West Texas Intermediate (WTI), the U.S. benchmark, rose above $70/bbl in May and remained there for most of the summer. So, I got the prediction right, but I admittedly didn’t anticipate the oil price collapse that would follow.

  1. For the first time since 2014, the average Henry Hub spot price for natural gas will be above $3.00/MMBtu

Natural gas prices have been depressed for several years, but natural gas inventories opened the year lower than normal. I was originally going to predict that natural gas prices would spend the year trading in a range of $2.50 to $3.00 per million British thermal unit (MMBtu) — which they did for the most part — but I decided to make the prediction a bit more aggressive than that. Primarily on the basis of lower inventories, I predicted that the average price would be over $3.00/MMBtu.

That prediction wasn’t panning out very well through September, but then the price finally responded as natural gas inventories continued to drop. By November, prices got close to $5/MMBtu, which helped push the average daily closing price to $3.16/MMBtu for the entire year.

  1. U.S. gasoline demand will set a new record high

I got a number of emails about this prediction. Some readers were certain that 2018 would be the year that electric vehicles (EVs) sent gasoline demand into permanent decline. One person went so far as to suggest that I was delusional to expect higher gasoline demand in 2018.

Well, guess what? I wasn’t delusional. Prior to 2018, the highest weekly gasoline demand ever recorded was 9.846 million BPD in August 2017. But 2018 saw weekly demand exceed that number five times. The highest number recorded was 9.899 million BPD in August 2018.

On an annual basis, 2018 also saw the highest gasoline demand on record. In 2018, annual gasoline demand reached 9.33 million BPD, beating the previous record of 9.26 million BPD set in 2017.

  1. Shares of Tesla will close the year lower

This is the prediction that went down to the final trading session of 2018.

I made this prediction understanding that shares of electric vehicle car maker Tesla often trade wildly out of sync with the company’s underlying fundamentals. Tesla CEO Elon Musk has shown an ability to sharply move shares based on comments that often have no basis in reality. Related: There Is Still Room To Run For Oil Prices

Nevertheless, fundamentals usually win out in the end, even though it can take a long time.

Tesla went on a wild ride in 2018. Shares opened the year at $312.00, and rose as high as $387 following comments from Musk that he had secured funding to take the company private. He hadn’t, and the subsequent fallout and news of an SEC investigation dropped shares all the way to $245. In fact, I received a congratulatory note at that point from someone who felt like this prediction had been secured.

That was premature, however, and shares bounced back once Musk settled with the SEC, and following better-than-expected 3rd quarter earnings.

But with less than a week to go in the year, shares were trading under $300 a share. Then on December 28th, the 2nd to last trading day of the year, shares surged when it was announced that Larry Ellison, founder of Oracle, would be appointed to Tesla’s board as part of the company’s settlement with U.S. regulators.

Shares surged well above $300 on the news, and closed on December 31st at $332.80, 6.7% higher than they opened the year. Thus, I missed on this one, albeit just barely and in typical Tesla fashion — as a result of a flashy announcement that caused the share price to surge.

I would add, in a footnote, that on January 2, 2019 — the first trading day of the year — Tesla shares have again plunged after missing Wall Street’s delivery estimates for vehicles. Today shares are trading at $308, once again below the level of a year ago. So, I missed this prediction by one trading day.

By Robert Rapier

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  • jhm on January 11 2019 said:
    Hey, Rapier, when do you predict that gasoline consumption will find a new peak in Norway? A few years back you were certain that EVs were not suppressing demand. Do you still think that way?
  • jhm on January 11 2019 said:
    The EIA reports that Finished Motor Gasoline supplied in 2017 was 9,327 kbpd, not 9.27 mbpd as reported by Mr Rapier. It will be several more months before the EIA reports its annual estimate of US gasoline consumption. So the jury is still out on Rapier's 4th prediction.

    I would also point out that the EIA weekly series is not so reliable. It does not track well with the month and annual series. It is also not clear how Mr Rapier constructed his annual average from that series, if indeed that was his source.

    I was not one how predicted that gasoline consumption would peak in 2017. But examination of 12 month averages of the EIA monthly data does suggest that 2018 could come in about 15 to 30 kbpd below 2017.

    But even if consumption has declined in 2018, how much of that would be due to EVs. Well, US PEV sales for 2018 were about 360k. This is enough to displace about 12 kbpd of demand. So we actually need EV sales to reach about 3M per year (about 17% market share) before EVs can drive a 100kbpd decline and overwhelm most other factors causing demand growth. So we need about 3 more doublings of EV sales before EVs force a reliable decline in gasoline. So the EV driven peak looks to be about 6 years away, 2024 give or take. Of course, other factors are inhibiting demand growth so the peak could come much sooner. Perhaps 2017 will prove to be that peak after all.

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