Stories by Adewale Sanyaolu
The oil and gas sector, being a global industry, is surrounded by so many factors that a policy in one clime is capable of changing its dynamics, either positively or otherwise.
The World Bank in its Commodity Markets Outlook report, projected crude oil price to rise to $56 a barrel in 2018, up from 2017 price of $53. It stated further that prices for energy commodities, which include oil, natural gas and coal are forecast to grow 4 per cent in 2018 after a 28 per cent jump in 2017.
Though, the World Bank Market Outlook report may be on a shaky ground as crude oil price rose to $67.10 a barrel last week.
Observers, however, believe that with the right policies from the Organisation of Petroleum Exporting Countries (OPEC), oil prices could maintain an average of $60 per barrel mark in 2018.
But to others, the prices could fall below the threshold as a result of technological advancements, which could see some countries reduce their dependence on fossil fuel. But what does 2018 have in store?
Most analysts believe more of the same – inventory declines, some shale growth, a gradual increase in the oil price and eventually, an end to the OPEC deal. But a lot of uncertainty remains.
Natural gas
According to Forbes, fear will drive oil prices in 2018 while the price of oil will be influenced by crude oil inventories, which are going to be driven by the balance between OPEC’s actions and US shale oil production. It stated further that inventories also influence natural gas prices but the drivers are different.
On the natural gas demand-side, growth remains robust. Pipeline exports to Mexico are surging, exports of liquefied natural gas (LNG) have reached 2 billion cubic feet/day (bcf/d), consumption in the chemical sector continues to grow and utilities are shifting toward fast-cycling natural gas plants to complement increasing amounts of intermittent renewables on the grid.
Each of those drivers has added significantly to natural gas demand in recent years. However, natural gas production growth has kept pace.
The shale revolution actually started with natural gas production, which turned upward in about 2006. Oil production began to rise in 2009, but along with it came associated natural gas. Just as the surge of shale oil production contributed to the collapse of oil prices, the surge of natural gas production – both from dedicated natural gas drilling and from associated gas production – collapsed natural gas prices.
Shale oil
According to Nick Cunningham, a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics expert based in Pittsburg, USA, there is no doubt that US shale output is continuing to rise, but there is quite a bit of uncertainty about the magnitude of growth. Expectations have fluctuated over the course of 2017. At the beginning of the year, outlets like the EIA and International Energy Agency (IEA) had very bullish predictions for shale output, with the EIA expecting US output to average 10 million bpd in 2018.
But as the year wore on, numerous red flags began to pop up that raised a lot of questions about the health of the shale industry.
Drilling costs began to rise again; some shale companies ran into operational problems; drilling activity fizzled when oil prices dipped below $50 per barrel, a sign that the shale industry’s break-even prices (on average) were not as low as many thought; the rig count dipped; and investors began demanding more restraint and a slower pace of drilling. These problems seemed to suggest shale was sputtering.
However, more recently, data suggests shale is back on track, posting strong production gains in September. In their December reports, the IEA and OPEC predicted US shale would add 870,000 bpd and 1 mb/d of new supply in 2018, respectively. That threatens to overwhelm demand growth but the extent to which actual growth lives up to those forecasts will go a long way in determining the pace of rebalancing next year.
•OPEC
OPEC production fell in November for the fourth consecutive month, dipping by 130,000 bpd compared to a month earlier. That puts the group’s compliance rate with the production cuts at 115 per cent, the highest number yet. The ability of OPEC to stick with its commitments is a positive sign heading into 2018 that they will be able to keep compliance rates high. To be sure, involuntary declines in Venezuela are somewhat masking less-than-100-per cent compliance from Iraq and the UAE, but a reduction of supply is a reduction of supply.
The big question is the durability of high compliance throughout 2018. An oil market that rebalances too quickly could lead OPEC members to abandon their pledges if they become tempted by higher oil prices. Russia has signalled that it is anxious to abandon the deal as soon as inventories fall back to average levels. The flip side is also true – a steep drop in prices could lure members into cheating as they become desperate for more revenues. But that is all speculation. For now, compliance looks good.
•Exit strategy
OPEC has restored some stability to the oil market with its resolve to maintain output limits and the strong cooperation, particularly between Saudi Arabia and Russia, reassured the oil market at the last OPEC meeting. Yet, they left the details of an exit strategy for a later date and the June 2018 meeting will carry extra weight, especially as the inventory surplus narrows. Exiting the production cuts is fraught with danger; even hinting that a return to full production could spook jittery oil traders, which is exactly why top OPEC officials were eager to push off that conversation. But by mid-2018, they won’t be able to avoid the issue. It’s likely OPEC will opt for some sort of glide path, a gradual lifting of the production limits but we’ll have to wait and see.
•Inventories
OPEC’s strategy will largely come down to what happens to global inventories. Organisation for Economic Co-operation and Development (OECD), commercial stocks declined by more than 40 million barrels last October, putting total stocks at 2,940 million barrels, the lowest level in more than two years. The stock surplus is now at about 100 million barrels more than the five-year average, down two-thirds from the start of 2017. It’s likely that the surplus will be erased at some point in 2018, at which point OPEC will be under pressure to abandon its production limits.
However, the IEA said in its December Oil Market Report that it expects inventories to begin rising again in 2018, largely because of blistering growth from US shale. The first half of the year, the IEA predicts, will see inventories rise at a pace of 200,000 bpd. If the agency is correct, zeroing out the surplus could prove elusive.
•Outages
All of these forecasts and predictions go out the window if supply disruptions occur. Recently, Forties pipeline cracked and shut down, and the pipeline’s operator declared force majeure on oil shipments. The 450,000-bpd pipeline was shut-in, leading to shutdowns at North Sea oil fields. This incident is exactly the type of event that can catch the oil market by surprise, leading to sharp and sudden price increases even if all seems well elsewhere in the world. There are plenty of potential flash points that could lead to supply outages in 2018. The most obvious is Venezuela, which is suffering from steep and ongoing declines. Venezuela’s output fell by 41,000 bpd in November from a month earlier, after suffering a decline of 26,000 bpd in October. Production is at a 30-year low and is heading south.
Other outages, according to Cunningham, are entirely possible in unstable countries like Nigeria and Libya. Conflict between the US and Iran would be a whole different animal, with serious implications for the oil market. Then, there are other potential outages that are entirely unpredictable beforehand.