December 2017 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil moved higher for a sixth consecutive month in December, increasing by $1.24 (+2.2%), to $57.88 per barrel. The advance coincided with a fractionally weaker U.S. dollar, the lagged impacts of a 225,000 barrel-per-day (BPD) rise in the amount of oil supplied/demanded during October (to 19.8 million BPD), and a further decline in accumulated oil stocks (to 424 million barrels). 

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“As usual, forecasts are mixed as to what will happen in the coming year,” wrote ASPO-USA’s Peak Oil Review Editor Tom Whipple. “For the immediate future, however, most are talking about prices continuing to move higher in the first quarter as Chinese demand is turning out to be stronger than expected and U.S. oil and product exports set records.

“The OPEC Production Cut: There are several scenarios as to how the production cut will play out over the next 12 months. The recent extension until the end of the year has put the cut on track to balance the markets at some point during the coming year. A few such as Iraq's oil minister see the markets balanced by the end of March, while the IEA is saying that it expects a return to rising inventories during the first half. This could reverse the recent prices increases and even cause an extension of the OPEC agreement into 2019.

“Oil producers will discuss an exit strategy for their deal on cutting output once the market moves closer towards being balanced, Russian Energy Minister Alexander Novak said recently. It will likely be summer before any action is taken unless widespread cheating begins if prices rise.

“U.S. Shale Oil Production: A recent Federal Reserve survey of 134 companies involved with shale oil production in the U.S. southwest says that nearly all companies are saying that oil prices must stay above $60 a barrel for a substantial increase in drilling to occur. Even if U.S. shale oil production continues to climb, it may not be enough to meet rising global demand for oil because of the large cutback in expensive conventional oil projects -- mostly offshore.  Offshore megaprojects will take many years to come online. Some believe we could see output deficits and much higher prices as soon as 2019.” 

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Oilprice.com Editor Tom Kool also highlighted the disagreement among market analysts about where prices go from here. “Some view oil as overpriced, with a price correction looming,” Kool wrote. “Others see oil prices grinding higher as 2018 wears on due to falling inventories.

“Barclays: Oil set for price correction. Barclay's analysts argue that oil prices are due for a correction, citing several reasons that point to a coming downturn. Investors are overstretched with bullish bets on oil futures, exposing the market to a snap back in the other direction. Also, China's economy is expected to slow in 2018, raising the risk of weaker-than-expected demand. Plus, oil supply is rising in the U.S., Brazil and Canada, among other countries. Inventories could start to build again in 2018, slowing the rate of rebalancing. Barclays notes that there are plenty of reasons why their forecast could be wrong, but they predict lower prices in the near-term.

“Trump could kill Iran nuclear deal in January. President Trump faces a series of deadlines in January that offer him the opportunity to tear up the 2015 nuclear deal with Iran. Every three months the President has to recertify the agreement, and Trump will have that decision before him again in about two weeks. ‘[I]n the event we are not able to reach a solution working with Congress and our allies, then the agreement will be terminated,’ Trump said in October. The President could restore sanctions on Iran, which could lead to an escalation of conflict.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.