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Robert Rapier

Robert Rapier

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5 Energy Sector Predictions For 2018

Electricity

The energy recovery is well underway. President Trump continues to roll back regulations aimed at boosting oil production and saving the coal industry.

How might this all play out in 2018?

Here are my predictions for some of the significant energy trends I expect this year.

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

In October and November of 1970, monthly U.S. oil production just breached 10 million barrels per day (BPD) for the first time. In the 47 years since monthly production has never again reached that level.

In fact, just before the shale oil boom, U.S. oil production had dropped below 5 million BPD. But by 2014 oil production had exceeded 9 million BPD, and was on a trajectory to exceed 10 million BPD in 2015. Then the bottom fell out of the oil market. Production declined. But over the past year, production has been on the way back up and is once more threatening that 10 million BPD record.

I think a new record is nearly a sure bet for 2018. I predict a new all-time monthly production record, probably in the first half of the year. I think it’s also likely that annual oil production in 2018 will beat the 1970 record of 9.637 million BPD.

2. Oil prices to reach $70/bbl

I alluded to this prediction last month, but after the recent price run-up, it seems less aggressive than it was then. Still, some pundits are suggesting that oil is now overvalued, and a pullback is inevitable. See here, or here for example. Related: The World’s Most Expensive Oil

But a few lonely voices have been forecasting $80/bbl oil by year-end. Indeed, if the crisis in Iran threatens the region’s oil production, $100/bbl isn’t out of the question this year.

I predicted $60/bbl for 2017, and it took until the last week of the year to reach that. There are a lot of headwinds for oil at this point. In particular, many oil producers are hedging at current prices, and there is a large backlog of drilled but uncompleted (DUC) wells. The latter can bring new oil production online quickly as oil prices rise.

Nevertheless, global crude oil inventories are declining, and demand continues to grow. Concerns that electric vehicles (EVs) are going to start taking market share from oil are way too premature. I believe that oil prices will trade in a relatively narrow range this year, but I predict that ultimately the price of West Texas Intermediate (WTI) will reach $70/bbl. For reference, the current price is $61.59/bbl.

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

Cold weather can play havoc with the natural gas markets. In 2014 the U.S. experienced a frigid winter. Natural gas in storage was drawn down to its lowest level in many years. As a result, natural gas producers spent the rest of the year trying to rebuild inventories. As a result of the lower inventory levels, the average annual price of Henry Hub natural gas was $0.67/MMBtu higher in 2014 than in 2013.

The average annual price in 2017 was just under $3/MMBtu. Before the recent cold snap, I was going to predict that supply would likely keep up with demand this year and that prices would trade in a range from $2.50 to $3. But given spiking demand caused by the “cold bomb” that just hit the northeast, natural gas storage levels are going to be lower than average for a bit.

I think inventories will get back to normal later in the year, but prices are likely to be elevated until then. As a result, I predict that for the first time since 2014, natural gas prices will average more than $3/MMBtu for the full year.

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

EV sales are at record highs and growing rapidly. The fuel economy of new passenger vehicles has increased by five miles per gallon since 2007. Nevertheless, U.S. gasoline consumption reached an all-time high in 2017.

The primary reason for the increase is that low gasoline prices have spurred an increase in the number of vehicle miles driven. Total vehicle miles driven in 2017 reached an all-time high. Low gasoline prices have also caused SUV sales to surge.

Gasoline prices are likely to rise in 2018, which will tap the brakes on demand growth. It is also possible that an economic slowdown could negatively impact gasoline demand. Nevertheless, I don’t expect prices to rise high enough to prevent a new gasoline consumption record from being set in the summer.

5. Shares of Tesla will close the year lower

Let me preface this prediction by saying I am a believer in the future of EVs. I also believe Tesla will strongly grow sales this year, and the company will reach some important milestones.

But there are huge expectations built into the share price. And they have consistently not been met.

I have seen Tesla report quarterly earnings that fell far short of investor expectations, and the share price nevertheless rose. I have watched Tesla CEO Elon Musk consistently overpromise and underdeliver. Investors don’t seem to care because they have faith that Musk will ultimately deliver.

Last year there was a growing disconnect between Tesla’s share price and Tesla’s financial performance. The share price reflected Musk’s projections and promises, but those lofty projections weren’t met. That disconnect can’t last forever. Related: Goldman: OPEC Will Talk Oil Prices Down If Brent Tops $70

Further, Tesla faces an ever-growing list of competitors in its space. The company is burning through billions of dollars in capital every quarter. They will almost certainly be forced to raise more money this year. Each delay allows competitors to close the gap.

But this is a risky call. Cult stocks can trade at irrational values for a long time. Stock prices are a reflection of underlying value and investor psychology. A company can sometimes command a market capitalization disconnected from its financial performance for a long time. But I think 2018 is the year that Tesla investors finally begin to lose some patience. Shares opened the year at $312.00. I predict they close the year lower than this.

Conclusions

There you have my 2017 energy predictions. The themes are higher oil production, modestly higher oil and gas prices, continued growth in gasoline consumption, and an EV company that finally experiences a correction.

By Robert Rapier

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  • Tom Blazek on January 11 2018 said:
    For the past year I have kept a spread sheet of the weekly EIA Data. I show 2017 US gasoline demand 87,135 BPD lower than 2016 not higher. 2017 average gasoline demand 9,264,212 BPD.

    2016 average gasoline demand at 9,351,346 BPD.

    The averages are from the weekly EIA Liquid Supply Estimates released every Wednesday.

    I do agree demand is looking up. For the last 13 weeks average demand in 2017 was about 172,000 BPD higher than 2016. So were off to a running start for higher demand.
  • Tom on January 11 2018 said:
    Robert one other thought, I don't see Tesla faltering. Oil company managements are fighting for profits and market share. This is what they have always done, not for making better, less polluting fuels, for a better world. Tesla isn't fighting that battle. Tesla is working on a better world, In my opinion Tesla wins it's place at the table, it's just a question of time. Big Oil just doesn't understand they need to clean up their fuels to compete. The future doesn't belong to carcinogens at the pump. When will Big Oil ever wake up?
  • Jhm on January 11 2018 said:
    So what is Tesla doing in a list of energy sector predictions? Didn't think an EV maker made any difference to energy markers.

    Maybe clickbait. Maybe a chance to repeat the perennial short thesis against Tesla. Or maybe Rapier is just hedging his bets.

    After all, if US oil production, oil price, natural gas price and US gasoline consumption are all up, that is a very bullish scenario for fossil fuels. But then in that scenario, the stock price for Tesla could also trade high. High fuel prices are great for EV, solar and battery demand.

    So If Rapier gets the first four right, we'll give him a pass on being sorely wrong about Tesla. But if things go badly on the first four, a bearish call on Tesla may look prescient.

    All the best for a happy and prosperous New Year. Go Tesla!

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