Oil Resurrection Sets Stage for Another OPEC-Shale Clash in 2018

Oil Resurrection Sets Stage for Another OPEC-Shale Clash in 2018
Oil continued its revival from the biggest crash in a generation.

(Bloomberg) -- Oil continued its revival from the biggest crash in a generation, with prices set for a second annual gain after a year marked by hurricanes, Middle East conflict and the tussle between OPEC and U.S. shale.

Futures are up more than 12 percent in 2017, having entered a bull market in September. In 2018, investors will watch whether rising prices trigger a new flood of U.S. output.

“The current highs are unsustainable in the short-to-medium term, with prices likely to head back below $60 once we get past January, but for now the season of goodwill appears to be in full swing,” said analysts led by Michael dei-Michei at consultants JBC Energy GmbH in Vienna.

West Texas Intermediate, the U.S. benchmark, is now trading at the highest level since mid-2015, pushed above $60 a barrel by a severe cold snap in the northeastern U.S. that spiked demand for heating fuel. Oil topped natural gas as the biggest source of electricity in New England on Thursday morning, after temperatures plunged well below freezing.

U.S. output has surged overall this year, hitting a 46-year high in October when producers pumped 9.6 million barrels a day, according to federal data. The U.S. expects production to top 10 million barrels a day in the coming year.

For now, shale drillers are showing restraint, with the number of working rigs unchanged for the second week in a row, according to Baker Hughes data released on Friday. The rig count, now at 747, stayed relatively stable during the last quarter, even as oil strengthened.

At the same time, speculation is rising that American drillers will put more rigs to work next year as oil strengthens. That could undermine plans by the Organization of Petroleum Exporting Countries and and other producers, including Russia, who have pledged to extend production curbs through the end of 2018 to wipe out a global glut.

"With that partially offsetting production cuts by OPEC and Russia, the market will have to get confirmation that global inventories will keep coming down," Gene McGillian, a market research manager at Tradition Energy in Stamford, Connecticut, said by telephone. "If we don’t see that pattern continue then, we could see a significant correction."

WTI for  February delivery settled at $60.42 a barrel, up 58 cents, on the New York Mercantile Exchange. Total volume traded was about 34 percent below the 100-day average. Front-month prices are about 12 percent higher this year, after rising 45 percent -- the most since 2009 -- in 2016.

Brent for March settlement rose 71 cents to close at $66.87 a barrel on the London-based ICE Futures Europe exchange. The February contract expired Thursday, after rising 28 cents to $66.72. The benchmark for more than half the world’s oil has gained 17 percent this year, after climbing 52 percent in 2016. It was at a premium of $6.45 to March WTI.

WTI traded at an average price of about $52 this year. U.S. crude stockpiles fell 4.6 million barrels last week to the lowest level since October 2015, according to the Energy Information Administration Thursday. That beat the 3.75 million average estimate in a Bloomberg survey of analysts.

“The tug-of-war between OPEC and the U.S. will continue to pressure oil from trading above $60 a barrel in 2018,” said Kim Kwangrae, a Seoul-based commodities analyst at Samsung Futures Inc. “Like we’ve seen this year, geopolitical risks will be the key factor going forward for oil to breach $60.”

Another possible risk for oil prices in the new year: President Donald Trump’s trade agenda. If Trump’s protectionist rhetoric results in real trade barriers, that could boost the value of the U.S. dollar, which would have an inverse effect on oil price, according to Bill O’Grady, chief market strategist at Confluence Investment Mgmt LLC.

"If there is a bearish wildcard out there, that’s it," O’Grady said in a phone interview. "That’s one of the key risks to our business."


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