Exclusive Analysis: Outlook for gas and oil in 2018

Oil traders expect a price of $80 dollars per barrel for “future oil contracts” during 2018 according to media sources. But clouds of uncertainty are still enveloping the oil markets amid a slow recovery in oil prices.

As for natural gas prices are expected to remain depressed throughout 2018.

When the shale oil revolution started in 2006, the interest in natural gas was escalating. Rising oil production in 2009 was accompanied by an increase in the production of natural gas. Both helped the prices to fall considerably in 2009.

Although the demand for natural gas remains strong, the prices plummeted Mid December to their lowest level since February 2017. The future contracts lost 1.8% down to 2.667 dollars per million British thermal units (MMBtu) or BTUs. Also, the inventories rose by 2 billion cubic ft. to reach 3695 billion cu ft.

Qatar Gas

Qatargas is the largest LNG producer in the world.

The Qatari Minister of Energy and Industry Dr. Mohammed bin Saleh Al Sada expects an over-supply of natural gas in the coming years due to increased production. Qatargas is the largest LNG producer in the world, with an annual LNG production capacity of 42 million tonnes per annum (mta).

In the USA the oil production doubled and also the natural gas production rose by 50% but the collapse of oil prices in the summer of 2014 played a major part in bringing production of crude oil and natural gas down. We must remember that the growth of natural gas production in recent years outstripped the demand and this, in turn, depressed prices which remained below $3 per MMBtu for the last 3 years.

However, the U.S. Energy Information Administration (EIA) reported at the end of November that U.S. natural gas stocks decreased by 33 billion cubic feet for the week ending November 24. Analysts were expecting a storage withdrawal of around 37 billion cubic feet. The five-year average for the week is a withdrawal of 47 billion cubic feet and last year’s storage withdrawal for the week totaled 50 billion cubic feet. Natural gas inventories fell by 46 billion cubic feet in the week ending November 17.

Oil and gas production

The oil outlook for 2018 is engulfed with uncertainty. There are different and often conflicting perspectives. The photo shows oil and gas construction platform in the gulf or the sea, production process for oil and gas industry.

According to Wall Street Journal November 30th; “natural gas futures for January delivery traded down about 3.5% in advance of the EIA’s report, at around $3.07 per million BTUs, and traded essentially flat shortly after the report was released. The 52-week range for natural gas is $2.90 to $3.83. One year ago the price for a million BTUs was around $3.59”.

The oil outlook for 2018 is engulfed with uncertainty. There are different and often conflicting perspectives.

The Russian perspective

It was reported early December that Russia’s Economy Ministry will increase its forecast for the price of the country’s Urals oil blend for 2018, following the extension of the OPEC/non-OPEC production cut agreement announced 1st December 2017 in Vienna. Under the deal, producers are cutting supply by about 1.8 million barrels per day.

Economy Minister Maxim Oreshkin said the new price level the ministry will work with will be above US$50. Previously, it was US$43.80 a barrel. Oreshkin recently warned the production cut agreement was harmful to the Russian economy as it discouraged oil companies from making new investments. In other words, Russia is pondering an exit strategy from the “production cut agreement”.

Alexander Novak the Russian oil minister said recently that the biggest challenge is how to wind down the production cut agreement after the balance returns to oil markets. So we have to prepare for this eventuality.

Alexander Novak and Khalid al-Falih

Russia’s Energy Minister Alexander Novak (L) and Saudi Arabia’s Energy Minister Khalid al-Falih.

Saudi response

Khalid A. Al-Falih the Saudi oil minister told The Bloomberg that it is premature to talk about an exit strategy. We still have 150 million barrels of surplus oil around which must be used up before we talk about an exit strategy. The market is still over-supplied.

OPEC and IEA: two different views

The OPEC data is pointing to markets rebalancing in 2018, while the IEA (International Energy Agency) insists that the goal is still elusive. As per the OPEC estimates, its production curbs are helping neutralize the oil glut and excessive oil inventories that have depressed crude prices for more than three years. The OECD energy watchdog IEA is of the view that despite the output cuts, the surplus will stay and barely budge in 2018.

According to Bloomberg, both the IEA and OPEC are converging on the fact the output cuts are working. The surplus oil inventories in developed nations fell to 111 million barrels in October, from 291m last November.

IEA believes that the glut will remain high and persist during 2018. OPEC, however, believes the over-supply will recede and the market will restore its balance. However, they agree that “Shale oil” will make up the shortage created by the Oil Production Cut. But also they agree that the cuts of 1.8 million barrel per day has been effective. So the fear is that shale oil producers will derail OPEC and Russia’s attempt to restore balance to the oil markets. The equation is simple: OPEC and Russia cut production, the US shale oil producers increase their production as prices recover to $65 per barrel or more.

Another factor that plays a role in oil price movements is the value of the US Dollar in relation to major currencies. An increase in the value of the dollar will depress prices and vice versa.

Meanwhile, British “future option” traders expect a price of $80 during 2018 but market watchers say this depend on the amount of oil produced outside OPEC. Currently, the price of the Benchmark Brent is around $63 per barrel, and WTI (West Texas Intermediate) is trading at around 57-58 dollars per barrel.

Obstacles and challenges

The London FT warned in a recent report that markets must watch out for a number of indicators during 2018 such as the strength of demand for oil as well as the impact of rising prices on shale oil production in the USA. The instability in Venezuela is a major concern. We know that global demand increased by 1.5 million barrels per day since 2014. The other point is the exit strategy that will be adopted by OPEC and Russia who expect oil markets to balance within a year. Traders and market watchers will be monitoring every statement from any oil minister to get an indication of the future plans of OPEC and other major producers like Russia.

The other headache according to the FT is Venezuela which is a founding member of OPEC and is going through a period of turmoil and uncertainty. Financial and political crises make the country a high risk. Its oil production was 2.5 million barrel per day in 2016 and now is less than 1.5 million barrel day. The shale oil production is the biggest threat to OPEC and Russia. It is estimated that at a price of $65 per barrel, shale oil production will be increased by 500,000 barrels and even by up to 1 million barrels per day.

The North Sea trouble

The BBC reported that one of the UK’s most important oil pipelines is being closed after a crack was discovered in Aberdeenshire Scotland.

The “Forties” pipeline carries North Sea crude across the land for processing at Grangemouth. The pipeline’s owner “Ineos” said last week that, despite pressure being reduced, the crack had extended. The Forties pipeline carries about 40% of North Sea crude oil. More than 80 platforms will have to suspend production.

The temporary closure of the Forties pipeline will deprive the markets of some 400,000 barrels per day.

World demand

However, with the projected increase in demand in 2018, OPEC said global demand would reach 98.45 million barrels per day next year, adding that “expansion in the transportation sector is expected to provide the bulk of oil demand growth”.

United States shale oil output now is increasing by 1.05m b/d in 2018 that was 180,000 b/d more than previously estimated which was on top of a 610,000 b/d rise in the previous month. OPEC output fell by 133,500 barrels a day last month to 32.45 million, according to the report. For 2018, the forecast for supply growth outside the cartel was increased by about 120,000 barrels a day to around 990,000 barrels a day.

Another lurking danger is that Canada and Brazil had embarked on oil production projects prior to 2014 i.e. during the $100 per barrel era, which are nearing completion which means about 500,000 barrels will be added to the market supplies.

The economic growth of the Middle East countries like Qatar is mostly dependent on their natural oil and gas.

Conclusion

Russia has emerged as a global energy superpower that can rival Saudi Arabia and the USA.

It is not possible to discuss oil prices without reference to China.

According to the London Daily Telegraph December 23rd, China an important producer and consumer of oil as well as the engine for global economic growth is now working with OPEC on a deal to share data and information relating to demand and supply which would help OPEC strengthen its grip on oil markets.

But this grip is likely to be undermined by shale oil producers in the USA who, prompted by higher prices, will increase their production thus undermining the OPEC-Russia strategy. However the most obvious dangers that threaten OPEC’s strategy are the rising tensions between Saudi Arabia and Iran over the war in Yemen and the other danger that will have an impact on prices, is the possibility of global demand for oil slowing down due to slow economic growth.

Nehad Ismail

Nehad Ismail is a journalist based in the United Kingdom. He writes on the economic issues particularly oil and gas. He has a special interest in the Middle East. He worked 15 years in the oil industry and 6 years in the media. He worked in a newspaper and in a TV channel presenting a political program between 2005 and 2010 (Arab News Network). His articles appeared in many esteemed media. He reviewed more than 12 books.
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