Crude oil prices should surprise on the upside in 2018, after a decent rebound this year, despite major oil forecasting agencies such as the U.S. Energy Information Administration (EIA) projecting a weakening of market fundamentals. The Saudi royal family has painted the kingdom into a corner through a series of missteps, making it increasingly important that crude oil prices are fairly high next year to ensure a successful initial public offering (IPO) for family-owned Saudi Aramco.

Moreover, the collapse in crude oil prices since mid-2014 has severely damaged the financial position of major oil exporting countries at best, and contributed to significant political instability at worst. Following rebounding oil production in strife-torn countries such as Libya and Nigeria in recent months, odds are such that we will see greater disruptions to supply next year at a time of relatively low spare production capacity.

The U.S. EIA is projecting oil market fundamentals to again loosen in 2018, after relatively tight conditions this year, despite global oil consumption growing at an increasingly brisk pace. Global demand is forecast to jump 1.69 million bbls per day to a shade less than 100 million bbls per day next year, compared to a more than respectable 1.35 million bbl-per-day increase in 2017. The EIA expects global oil consumption growth to continue to be supported by relatively weak oil prices, with WTI averaging roughly US$49 per bbl this year and US$50 per bbl next, compared to US$43.33 in 2016.

The EIA has global oil fundamentals flat this year, after global supply exceeded consumption by 280,000 bbls per day in 2016. It is forecasting global oil inventories to build by 330,000 bbls per day in 2018. Non-OPEC supply is projected to increase 860,000 bbls per day to 58.8 million bbls per day in 2017, and another 1.35 million bbls per day next year. U.S. oil production, powered by Permian tight oil, is forecast to account for over four-fifths of the non-OPEC increase this year and almost two-thirds of the 2018 jump, despite crude oil prices supposedly remaining in the doldrums.

Relatively weak oil prices are not what the House of Saud needs for a successful Saudi Aramco IPO. Since his accession to the throne in January 2015, King Salman has consolidated the power of the so-called Sudairi Seven, the clan of seven full brothers of the kingdom’s founder, and then further consolidated power into his own line of the family. The king originally named his nephew Muhammad bin Nayef the crown prince, and his 29 year old son Mohammad bin Salman (MBS) the deputy crown prince. On June 21, King Salman replaced his nephew with his son as crown prince.

Some would say this was a classic case of rewarding failure, given MBS being the architect of recent military misadventures in Syria and Yemen — reportedly against the better judgement of the former crown prince — and the premature end to the oil price war which has led to the rapid rebound in U.S. oil production. The combination of rewarding failure and concentrating power in one line have the potential of causing a rift in the royal family, especially as previous Saudi kings distributed power much more widely.

The prosperity of Saudi Arabia is also under threat. The kingdom is heavily dependent on oil revenues for budgetary purposes and foreign exchange. But the global campaign against carbon emissions on the consumption side, and the U.S. light tight oil (LTO) revolution and its probable spread on the supply side are both likely to constrain oil prices and oil revenues in the future. On the demographic front, the youthful Saudi population is rapidly rising.

This potentially dire economic predicament led MBS to spearhead Saudi Vision 2030 — a plan to boost the kingdom’s private sector to increase employment and decrease reliance on oil revenue and financial subsidies to their subjects — and the IPO for five per cent of Saudi Aramco by the end of next year. The Saudis have targeted US$100 billion for this small stake, for an overall valuation of US$2 trillion for the oil company, but relatively high crude prices are a prerequisite for achieving it.

The need for higher crude oil prices is at least one of the reasons for the House of Saud’s recent charm offensive towards Russia. President Vladimir Putin has his own reason to support oil prices early next year; the first — and likely only — round of the Russian presidential election in mid-March. But the Saudi Aramco IPO is not to be held until late in the year, giving cause for King Salman to encourage President Putin to extend the 1.8 million bbl-per-day OPEC/non-OPEC production cuts from the end of March to the end of December during his “historic” Russia visit in early October.

At the same time, major oil exporting countries are likely to see more, rather than less, unplanned outages next year, at a time when spare production capacity is relatively tight. Libya and Nigeria have recently had significant rebounds in crude oil production despite continuing political instability in each, while Venezuela's dwindling oil production — roughly two million bbls per day compared to a record high of 3.5 million bbls per day in December 1997, the year before the Chavistas first gained power — remains under threat given that country’s precarious situation.

A series of military and diplomatic victories by General Khalifa Haftar and his so-called Libyan National Army allowed the country’s crude oil production to jump 600,000 bbls per day to 850,000 between August 2016 and June. But these same victories have drawn a target on his forces, putting the all-important Oil Crescent area around the Gulf of Sidra under threat. Nigerian oil production has increased a less impressive 260,000 bbls per day to 1.95 million bbls per day between December 2016 and June, but the government's ham-fisted reaction to the new Biafran movement is again jeopardizing production in the Niger Delta.

Based on EIA data, OPEC members suffered 2.2 million bbls per day of unplanned production outages in 2016, contributing to a paltry 1.15 million bbls per day of OPEC spare capacity being available in case of emergency. OPEC outages have slipped to roughly 1.3 million bbls per day presently, with spare capacity now standing at around two million bbls per day.

As a result of these factors, Geopolitics Central is projecting substantially higher crude oil prices next year than the EIA due to substantially tighter market conditions. Spot WTI is forecast to average US$62.50 per bbl in 2018; add $2 for international marker Brent. Higher prices will lead to slightly slower global oil consumption growth — 1.59 million bbls per day versus 1.69 million bbls per day — and higher U.S. oil production growth — 1.41 million bbls per day versus 1.11 million bbls per day — next year.

But the assumed extension of OPEC/non-OPEC production cuts to the end of next year, additional Saudi cuts, and an increase in geopolitically-inspired production outages will more than counter lower global consumption and higher U.S. oil production. Geopolitics Central is projecting global consumption to exceed supply by 500,000 bbls per day in 2018, bringing global oil inventories back down around the five-year average by the end of the year.