What Will Drive Oil Prices in 2018.....

As we close out 2017, market watchers now focus their attention on what will drive oil prices in 2018. First, and most importantly, will be weather OPEC sticks to its recently extended production cuts. Notably, OPEC and its allies outside the group agreed to maintain oil production cuts until the end of 2018, extending their campaign to wrest back control of the global market from America’s Shale Industry. Subsequently, Brent crude surged into a bullish, backwardated structure towards year-end as OPEC-led output cuts tightened global supplies. OPEC members plan to review the production limits at its June 2018 meeting.

Secondly, the US Shale Industry's response to higher oil prices in 2018 will have a significant impact on whether oil prices will have a ceiling. With shale growth driving forecasts of record U.S. supply in 2018, this could push out the balancing of global supply and demand until late 2018. Notably, the International Energy Agency (IEA) recently stated that increased US shale production could lead to an oil surplus of 200,000 barrels a day in the first half of 2018 before the market sees a deficit of 200,000 b/d later next year.

Finally, geopolitical risks are always a factor, which could impact oil prices in 2018. Specifically, geopolitical risks have flared in a host of major oil producing countries in recent months. Venezuela, Iran and Saudi Arabia top the list of countries that could see oil-related disruptions in 2018. Interestingly, recent positive developments in the oil market, most notably the OPEC cuts, have resulted in a record number of bullish bets in Brent and WTI combined heading in 2018. These bullish contracts now outstrip bearish ones by seven to one, however the types of players making these bets (speculators vs. long term) remains unknown. As oil watchers seek to plot a course through the year ahead, one thing is for certain, 2018 will likely bring more volatility and uncertainty in the global oil markets.