Analysis: Crude Prices To Strengthen Through Next Year
International benchmark crude prices played out basically as expected by Geopolitics Central (GPC) in the first quarter of the year, with a few interesting twists on the market fundamentals front and growing signs of ongoing Russia-OPEC co-operation encouraging us to maintain our current short-term outlook – albeit with an adjustment to the trajectory of crude prices through the end of 2019. GPC is forecasting spot WTI to average US$65/bbl in 2018, compared to roughly US$63 in the first quarter, and US$70/bbl next year.
In our last quarterly update (Politics To Continue To Drive Crude Prices Through 2019), we argued strong oil market fundamentals and widespread geopolitical concerns would drive spot WTI to US$70/bbl by mid-year, before the focus of market players shifted to the scheduled unwinding of the 1.8 million bbl/d OPEC/non-OPEC pact and potential implications of rapidly rising U.S. light tight oil (LTO) production. WTI was projected to drop back below US$65/bbl by the end of the year, before increasing to US$75/bbl through 2019 on rising geopolitical disruptions to supply and solid market fundamentals.
The primary reason for GPC’s relatively bullish short — and medium — term oil price outlook has been our expectation of ongoing oil market co-operation between Saudi Arabia and Russia, on an as need basis. OPEC kingpin Saudi Arabia needs relatively high crude prices for a successful initial public offering (IPO) of a five per cent stake in Saudi Aramco in late 2018 or early 2019 and to help finance the kingdom’s economic transition under Vision 2030 thereafter. Non-OPEC kingpin Russia needs higher crude — and crude-indexed natural gas — prices to finance its junior partner role in the New Cold War against the West.
In late February (Future Of OPEC And Oil Prices), for example, GPC wrote: “Saudi Arabia and Russia — formerly arch-foes, especially in the days of the godless USSR — have forged a strong diplomatic and economic relationship, including numerous bilateral investment agreements in the oil and gas sphere, since the original agreement between OPEC and 12 non-OPEC countries to cut crude production in December 2016. This new relationship between the two oil kingpins likely foreshadows ongoing co-operation between OPEC, Russia and some other significant non-OPEC oil exporters in an attempt to maximize crude prices and revenue as the world gradually transitions to a low-carbon world.”
But, frankly, GPC was surprised by the timing of Crown Prince Mohammad’s announcement of potential long-term oil market co-operation between Saudi Arabia and Russia, which in turn has impacted our outlook for the trajectory of crude prices in the short term. On March 26, during an interview with Reuters, Saudi Arabia’s de facto leader said Riyadh and Moscow had agreed in principle to a 10 to 20-year arrangement to control world oil supplies, with the details still to be determined.
Two days later the Secretary General of OPEC, Mohammad Barkindo, acknowledged that the cartel is seeking “very long-term” co-operation with other crude exporters. This was confirmed on April 3, when Russian Energy Minister Alexander Novak said OPEC and non-OPEC exporters may set up a joint organization for co-operation once current oil output curbs expire at the end of this year. GPC is now forecasting international benchmark crude prices to gradually increase between now and the end of 2019.
In terms of interesting twists on the fundamentals front, U.S. oil production growth was stronger than anticipated by GPC in the first quarter and the collapse in Venezuelan crude output even more precipitous. Based on preliminary data, U.S. oil production — including NGLs and biofuels — gained a whopping 1.71 million bbls/d year-on-year to a record 16.41 million bbls/d in the first quarter, with growth stronger in March than January.
This has led us to increase projected growth in U.S. oil output for the year to 1.90 million bbls/d, compared to our previous forecast of 1.34 million bbls/d — and a record annual increase of 1.75 million bbls/d in 2014 that led to Saudi Arabia’s 2014-16 oil price war in an ill-fated attempt to discipline U.S. LTO producers. Growth in U.S. oil output for next year is held steady at 1.54 million bbls/d.
Venezuela is one of four OPEC countries that GPC had identified as a likely candidate for a substantial decline in crude production for geopolitically related reasons through 2019 — along with Iran (new U.S. sanctions biting); Libya (post-election violence); and Nigeria (rising separatism in Niger Delta). The country is in political, financial and economic free fall, with crude production below its OPEC target of 1.972 million since October.
Venezuelan crude production was penciled in to decline by 300,000 bbls/d annually this year and next, roughly the same level of decrease as each of the past two years, but based on preliminary data output has fallen by around 400,000 bbls/d in the first three months of this year alone. Production collapsed to 1.56 million bbls/d in March, less than half the monthly record high of 3.41 million bbls/d set in December 1997 — a year before the Chavistas first gained power. Venezuelan production is now assumed to decline 500,000 bbls/d this year and next.
Despite these adjustments to U.S. oil production and Venezuelan crude output, GPC is continuing to project global oil consumption to exceed global supply by 500,bbls/d in 2018, pushing global inventories below “normal” levels, and the world oil market to be in balance next year. Global oil consumption is expected to increase a robust 1.52 million bbls/d to 100.02 million bbls/d this year, and another 1.22 million bbls/d in 2019. If not for the budding trade war between the U.S. and China, and its potential negative impact on global economic growth, GPC would have upped our projection for global oil consumption growth, especially for next year.
Non-OPEC supply is now forecast to increase 2.14 million bbls/d in 2018, and OPEC supply to decline by 570,000 bbls/d — compared to 1.58 million bbls/d and 160,000 bbls/d previously — with Venezuela accounting for most of OPEC’s decline and Saudi Arabia cutting more than its agreed 486,000 bbls/d to make up the difference to provide additional support for crude prices.
Next year, OPEC supply is forecast to increase 240,000 bbls/d, whether the cartel’s 1.2 million bbls/d production pact comes to an end or not, and non-OPEC supply to increase 1.48 million bbls/d. GPC is continuing to assume 1 million bbls/d of additional OPEC crude will go offline for political reasons, with Venezuela now accounting for half this amount. As a result, OPEC’s unplanned outages will total 2.95 million bbls/d in 2019, and spare capacity a mere 1.28 million bbls/d, leaving relatively little crude available in case of emergency, and hence, upside risk to our crude oil price outlook.