Part 2: Oil Prices to Rise in 2nd Half 2018?

Part 1 of this blog dealt with potential supply issues for the 2nd half of 2018. Let's start this blog post off by looking at a suggestion that the world should drive down oil prices due to international issues.

I was flipping the channels and came across CNN on Saturday morning (4/14). Former CIA Director Woolsey was on. He was specifically talking about Syria and Russia, but oil came up in the conversation. Here's what he had to say on the topic:

I don't know if it's the plan, but I know what I think would have a much larger effect on the approach toward complying with the U.N. resolutions and the rest for Iran and for Syria and for Russia, which is to work hard on lowering the price of oil down into, say, the 40s instead of up in the 60s and 70s. Once you can do that, and I think there are good ways to do it, you have a Russia and a Syria that are about as sad as national governments get because that's all they have to sell and you drive the price down by a third of -- you have a not particularly assertive Russia and Syria I think and Iran in front of you.


Now not to question a former CIA Director, but I couldn't help but put his statement into context of the OPEC report via Bloomberg. Likely the only way to drive oil prices down to that degree would be to have the Saudis decide that the OPEC/Russia oil cuts should end now versus later. Yet, the Saudis want to keep the cuts in place. I'd assume for two reasons. First, it helps with the IPO for Saudi Aramco that they want to happen at some point. Second, they have the Vision 2030 to help diversify the economy. Why would they be interested in driving oil prices down into the 40s? To do so, the US would likely have to provide some incentives. One incentive off the table would be curbing shale production as the US doesn't work that way. So we'd have to provide some monetary or military/anti-Iran incentives.

Comparing forecasts made in 2017 to current assumptions

Back in late December I wrote the following blog comparing forecasts for 2018 via both Goldman Sachs and IEA. Both seemed to believe that oil prices would remain relatively flat for the year, around the $60 range. Currently, Brent is at 72 and WTI is at 67.

I'd also mentioned in that blog that Morgan Stanley believed at the time that oil rigs in the US needed to increase by 8 - 10 a month to off-set the OPEC cuts.

Here's the rolling data since that time:

Oct 17: -13
Nov 17: +10
Dec 17: 0
Jan 18: +12
Feb 18: +40
Mar 18: -2

The average monthly increase comes out to 9.4 additional rigs per month. So the US should basically be off-setting OPEC production cuts; however, inventory levels are set to decline dramatically.

What's going on for the Goldman Sachs, IEA and Morgan Stanley to be so off? I think NASDAQ sums up everything above nicely:

An anticipated surge in demand this year is set to push global consumption above 100 million barrels per day threshold for the first time. However, supply from OPEC - which still accounts for roughly 40% of the world's crude - is expected to remain weak throughout 2018. The cartel's strong adherence with the production cut pact (now at 163% of target levels) has meant that worldwide supplies, currently at around 98 million barrels a day, are lower than demand.

Demand is higher than anticipated. OPEC (driven by Venezuela) is over-adhering to their production cuts. That's a solid enough reason for why 2018 forecasts by the oil analysts are likely to be off.

And a big question for me: at what point do investors take a chance in Venezuela and help their oil industry out. If prices keep rising, I'd think some nation (China/Russia) would considering putting in some money. In the case of China and Russia it would mean investing even more money into the country.