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Is This As Good As It Gets For Oil?

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Oil Markets In Limbo Ahead Of OPEC Meeting

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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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2018: The Year Of The Oil Bulls

Oil started this year with further price gains despite the quick restart of the Forties pipeline and the equally quick repairs of a pipeline in Libya, where a pipeline blast boosted Brent and WTI in the last days of 2017. Usually, such force majeure events are quick to push prices up and down, but this time, only the push up materialized. Sentiment on the oil market is more bullish than it has been for a long time. But how long will this optimism hold?

Last week, Bloomberg’s Alex Longley listed five factors to watch this year in oil, among them the OPEC cuts, geopolitical risks, the record-high number of long positions on crude, and of course, U.S. shale.

Right now, it’s clear that optimism prevails over any worry that some OPEC members might cheat on their quotas or that Venezuela, for example, could increase its oil production, the chances of which are virtually nonexistent.

In geopolitics, the latest from the Middle East only reinforces this optimism: Thousands in Iran have taken to the streets to protest against economic hardships and government policies. More than a dozen people have been killed, and the situation remains risky as protesters have ignored President Rouhani’s calls for calm and warnings that a clampdown on the protests is forthcoming. Related: Higher Oil Prices Slow China’s Crude Stockpiling

Looking ahead, analysts identify Venezuela and Saudi Arabia as the other hotspots that could swing the oil market this year. The situation with Venezuela is fairly clear, with the economic crisis deepening and people’s disgruntlement growing. Saudi Arabia is on the short list because Crown Prince Mohammed bin Salman’s reform drive will see fuel prices alone jump by as much as 80 percent this year. Add to this the introduction of new taxes, and there is ample ground for protests in the kingdom as well.

The record-high long bets on both Brent and WTI, however, are a mixed blessing. On one hand, they are a clear indicator of overwhelming optimism, which could push prices even higher. However, the higher they go, the sharper they can fall, should speculators decide it’s time to take profit. Of course, there is no certainty this is going to happen, because, as DNB Bank’s chief oil analyst Torbjorn Kjus told Bloomberg, “We don’t know the type of players. If they want to have a larger part of their assets in commodities for the next couple of years, then they’re not going to sell those positions.” Related: Oil Sees Strongest Start Of Year Since 2014

With so much good news for oil prices, it becomes doubtful to what extent the growth in U.S. shale production that will drive the daily total above 10 million barrels this year will affect prices. This growth is the number-one headwind for prices, and it seems to be losing its power.

Forecasts point to stronger demand thanks to economic growth and the special appeal of WTI because of its discount to Brent, which currently stands at around $7 a barrel. OPEC is producing less, and the results of the cuts are now evident. U.S. drillers are producing more, but there is mounting pressure from shareholders to rein in production growth and start making profits instead. At the start of 2018, the immediate future looks pretty rosy for oil prices.

By Irina Slav of Oilprice.com

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