By Gregory Brew
Division among the world’s biggest oil traders indicates the strong degree of uncertainty in the market.
According to Bloomberg, questions over demand growth, relative production from the U.S. and OPEC and the lingering glut are dividing prognosticators and generating some seriously divergent views of what the future holds for oil prices.
Glencore Plc (OTCPK:GLCNF), Gunvor Group Ltd. and Trafigura Group Pte are all bullish, Bloomberg notes, estimating that prices will exceed $60 by late 2018. Trafigura is particularly optimistic, noting that OPEC cuts and surging demand will allow market rebalancing in 2018, while a lack of new production due to cuts in capital expenditure will see a shortage in markets by 2019, lifting prices further.
Trafigura’s co-head of group market risk Ben Luckock declared an end to “lower for longer” in September, noting that surging demand in India would drive global demand and squeeze supplies by 2020.
India, often cited as the world’s fastest-growing oil consumer, has actually seen a decline in oil demand this year due to environmental disasters, including widespread flooding. Consumption of all fuels fell from 16.78 million tons per month in August 2016 to 15.75 million tons this last August. Oil demand is nevertheless expected to surge, with demand growing between 8-10 percent, according to forecasts by Platts.
On the other side of the debate is Vitol Group. CEO Ian Taylor sees Brent falling to $45 in 2018. For Vitol, it’s not demand but production that will be decisive, as Taylor predicts another big surge from U.S. shale. Production in the U.S. has increased from 8.9 million bpd in January 2017 to 9.48 million in October, according to the Energy Information Administration, which expects it to rise still further in early 2018, possibly exceeding 10 million bpd.
Peak demand has been discussed throughout the year, as some of the majors anticipate lower for longer stretching past 2025 and beyond. Wood Mackenzie says that peak demand is "very real," with demand declining by 4 million bpd between 2020 and 2035. Other majors, including BP plc (NYSE:BP) and Total S.A. (NYSE:TOT), see peak demand as coming between 2025 and 2040, driven in large part by changing government policies, slower economic growth and wider use of electric vehicles (EVs).
If EVs are adopted on a large scale, prices could fall to $10 as early as the 2020s, according to one official speaking to CNBC. But skeptics argue that support for EVs is too weak and the demand too stagnant without major changes to existing infrastructure. Markets in Western Europe are planning to phase out gasoline and diesel vehicle sales in the next few decades. China plans a massive rollout of EVs to help cut down on pollution, but has pushed back its timetable in order to give automakers more time to adjust.
Norway’s Energy Minister estimates that demand will remain strong into the 2040s, enough to support further exploration. OPEC is characteristically optimistic, as Secretary General Mohammed Barkindo discussed the possibility of permanently institutionalizing the group’s alignment with Russia and other non-OPEC producers over production cuts. Barkindo emphasized the importance of “fiscal discipline” moving forward.
OPEC now estimates that global surpluses will clear in the second half of 2018. But its figures are at odds with the International Energy Agency (IEA), which sees 1.5 million bpd in new production, compared to OPEC’s 900,000 bpd estimate.
The uncertainty is exacerbated in a recent spike in geopolitical risk, particularly in Iraq and Iran. But predicting the impact of risk has become a lot harder as markets adjust to realities faster than they have in the past. Violence in Iraqi Kurdistan could push prices past $60, but only in the short term; if there’s a boost in U.S. shale this fall, the increase could be much smaller, and it may not come at all. So far, the reaction in the WTI and Brent has been tepid, with prices falling between October 17 and October 20.
The market was especially volatile in the last three years, as prices collapsed in 2014 and recovered slightly, only to crash again in early 2016. The recent rise above $50, which many traders have come to accept as a new norm, has made some confident, while others point to long-term trends as reasons to be pessimistic about further price increases.
The divergent opinions among prognosticators about peak demand, demand growth and supply-demand rebalancing in the near term will only make it harder to tell where the market will go from here. Expect more volatility, not less.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.