With the introduction of the OPEC/non-OPEC production cut agreement in January 2017, I said that the oil price will break through the $60 level in 2017. This the oil price did when it had risen to more than $66.78 a barrel by the end of December 2017.
And despite efforts by vested interests including the International Energy Agency (IEA) and the United States Energy Information Administration (EIA) to dampen oil prices, I am now projecting that the oil price could be heading towards $70 a barrel or even higher during 2018 and $100 or higher in 2020.
Oil started the year with further price gains despite the quick restart of the Forties pipeline and the equally quick repairs of a pipeline in Libya. Sentiment on the oil market is more bullish than it has been for a long time.
What will be driving the oil price in 2018 is a healthy global demand for oil getting healthier by the day. The first law of oil economics is supply and demand. All other factors are extras. The second law is that oil is like a coin: one side is economics and the other is geopolitics, and the two sides are inseparable.
When there was a glut in the global oil market between 2014 and 2017, the oil price trended downwards ignoring all geopolitical developments such as the war against Daesh in Iraq, the war in Syria, escalating tensions between Saudi Arabia and Iran, rising tensions between Iraqi Kurdistan and Iraq and the war of words between the United States and North Korea.
Now that the market is re-balancing, any small geopolitical event pushes the price upward.
One thing, however, was very noticeable in 2017. Without fail, every time the oil price showed signs of escalating, vested interests came up with claims intended to dampen its rise such as the most recent one that U.S. shale oil production is projected to rise to 10.5 million barrels a day (mbd) in 2018 and 11 mbd by 2019.
All eyes will, therefore, be on U.S. shale in 2018 to see whether it can spoil the oil price rally. However, the world should start to get used to higher oil prices as the global oil market completes its re-balancing, probably by mid-2018 or even earlier. Claims about rising U.S. shale oil production, whether true or not, will no longer deter the oil price surge.
While the U.S. shale production has enabled the United States to reduce its oil imports, there has been a lot of hypes surrounding it with regard to its ability to cap oil prices, profitability of the shale oil industry and the continued rise in production.
To start with, the U.S. shale oil industry will never be a profitable industry. U.S. shale oil producers are so deep in debt that they have become like the saying of “robbing Peter to pay Paul.” They are heavily indebted to Wall Street to the extent that they continue to produce oil even at a loss just to pay some of their outstanding debts.
There is mounting pressure on U.S. shale producers from shareholders to rein in production growth and start making profits instead.
Because of a very high depletion rate estimated at 70 to 90 percent, U.S. shale producers have to spend billions every year to drill thousands of wells just to maintain production. In doing so they sink deeper and deeper in debt. Sometime in the foreseeable future, there may not be any rich shale plays left in the United States from where to produce oil.
Still, more cracks are beginning to appear that raise serious questions about the long-term future of U.S. shale oil production.
While the U.S. shale industry has boasted of higher initial production (IP) rates from their shale wells in recent years, there is some evidence that suggests those higher IP rates do not necessarily translate into larger gains in the total volume of oil and gas that is ultimately recovered. According to Rystand Energy, an independent Norwegian-based energy research and analysis outfit, a sample of wells in the rich Eagle Ford shale basin in Texas showed that higher IP rates in recent years were offset by steeper declines than before.
Threatening the oil price with claims about U.S. shale oil production has lost its impact on oil prices. The global oil market has already seen through that ploy. The proof is the current rise in oil prices. Claims about rising U.S. shale oil production, whether true or not, will not deter oil prices from rising to a projected $70 per barrel or even higher in 2018 and probably $100 by 2020. Moreover, $70 per barrel will be the new floor for oil prices in 2018.
Still, a fair oil price, in my opinion, is $100-$130 a barrel. Such a price would provide sufficient return to the oil-producing countries, thus enabling them to invest in oil exploration and capacity expansion to meet an incoming oil supply gap in the next three years. It enables the global oil industry to balance its books and invest in new projects worldwide. It also enhances global oil investments. All in all, it will give a big stimulus to the global economy.
The oil price in 2018 will triumph over U.S. shale oil and OPEC, which underpinned the price by its production cut agreement, is winning the war against the U.S. shale oil industry.
