Oil and Gas

2018: Oil’s Breakout Year?

Once again, 2017 proved the naysayers wrong…

The markets didn’t crash. The world didn’t end…

And crude oil isn’t dead!

Investors were uneasy about crude at moments. I know this because they sent me hundreds of emails.

But after struggling through a volatile first few months of 2017, the price of crude then launched into a tremendous uptrend…

Source: Bloomberg Energy

Oil surged 41.5% from its late June low of $42 per barrel to end the year above $60.

This move was overshadowed by the broader markets, bitcoin, and the feast and famine of tech IPOs.

But for all of us energy investors, we understand that this is the highest level crude’s been at in more than two years.

So… now what?

We’re up 130% from the February 2016 lows.

And as we flip the calendar to 2018, investors are wondering what to expect going forward.

Are we about to see another year of gains?

Or is the dramatic run from that 12-year low of $26 finally coming to an end?

If you ask me, I think we’ll see a repeat of 2017 this year.

First and foremost, let’s not kid ourselves: The move by OPEC and its allies to cut oil output was one of the biggest driver of oil’s move higher in the second half of 2017.

This will continue to be one of the most important energy story until June, when OPEC has to make the next major decision on production cuts.

Without the cuts that have already happened, the global supply of crude would’ve increased 2.4 million barrels per day (bpd) in 2018.

I think the output cuts will continue.

As I mentioned at the beginning of December, the supply cuts from OPEC ate away at the global oil glut in the final six months of 2017. Global inventories fell below 3 billion barrels for the first time in two years.

Going forward, as the cuts continue, the oversupply will be eliminated. We could even see a supply deficit.

Global consumption of crude continues to increase. Next year, it should top 100 million bpd for the first time ever.

The other major impact on crude comes from U.S. producers.

There’s been a war waging between OPEC and U.S. shale over the past year. OPEC curbs supply, and U.S. producers increase output.

The result: U.S. crude output is at records levels, totaling more than 9.7 million bpd.

U.S. crude production should top 10 million bpd in 2018, setting a bevy of new records and milestones.

But the price of crude is still rising.

Again, the inventory story is at work here.

To close out 2017, the Energy Information Administration announced that U.S. crude inventories fell by 4.6 million barrels from the previous week’s count.

That was a 1% drop just from the previous week’s crude inventories.

But don’t overlook the much larger change underway…

Since December 23, 2016, U.S. crude inventories are down 11.2%. And since their peak at the end of March 2017, U.S. crude stockpiles have fallen 19.1%.

On top of this, U.S. net imports of crude continue to decline as exports soar…

In other words, despite pumping out crude at a record pace, America’s massive supply glut is rapidly declining.

New Discoveries Hit 70-Year Lows

We’re experiencing something we haven’t seen since the 1940s. Last year, just 7 billion new barrels of oil equivalent were discovered. The total volume of discoveries has been in decline since 2012.

With crude’s precipitous fall from $100 per barrel, hundreds of billions of dollars in projects have been shelved.

This could bring about a supply deficit – not just in the near term but years from now as well.

Oil’s Political Minefield

There are numerous political stories around the world that are sending oil higher…

Libya’s output was recently reduced by nearly half due to an explosion that damaged a pipeline. The country also saw sporadic shutdowns and disruptions caused by protests, fighting and power blackouts.

Once the severe sanctions against Iran were lifted in 2015, Iranians thought life would get better. It didn’t. Unemployment and inflation have soared. Protests have been turning increasingly violent. Plus, the U.S. is expected to impose new sanctions against the OPEC nation.

But it doesn’t stop three. Crude is even more vulnerable to geopolitical events because of the growing number of exchange-traded funds pertaining to oil.

Oil in 2018

The current price of crude is already higher than the forecasts. The price of WTI crude is expected to average $55 a barrel this year, according to a recent Bloomberg survey.

WTI is currently a full 10% above that level – goosed in part by Libya and Iran.

Nonetheless, we could easily see $75 WTI in 2018. Falling inventories in the face of record output is a good sign. And we’re seeing economic conditions improve not just in the U.S. but around the globe.

As I said before, if there’s a major disruption, $100 oil might not be out of the question…

Good investing,