Where will oil prices and supply-demand land by the end of 2018?

By Bryan Livingston
Managing Partner

Just when you think things couldn’t get more interesting, they do.

The latest news that two Chevron officials detained in Venezuela last week could be charged with treason, a crime that carries a 30-year sentence and limits access to due process, is certainly alarming. We’ve been reading Reuters’ exclusive coverage on developments while pondering what this means to global oil supply and demand, oil prices, and the future of foreign oil companies operating in Venezuela and other trouble spots around the world.

The deteriorating situation in Venezuela, Saudi Arabia’s efforts to target a price of $80 a barrel for oil, and continuing uncertainty in Iran and Libya are playing their respective parts in today’s higher oil & gas prices.

We witnessed Brent crude briefly surpass $75 a barrel, a three-year high this month, and West Texas Intermediate crude recently reached $69.56, also a three-year high. Both gave up ground on April 24 as President Donald Trump, meeting with French President Emmanuel Macron, signaled that the U.S. and France may reach an agreement to preserve the Iran nuclear deal.

Stephen Innes, head of Asia-Pacific trading for futures brokerage OANDA, told CNBC that new sanctions against Iran “could push oil prices up as much as $5 per barrel.”

Foreign uncertainty and the effect on prices

Uncertainty over the Iran nuclear deal and the increasingly unstable situation in Venezuela, home to the world’s largest oil reserves, lead us to pay close attention to the two countries as we consider the near-term global oil market.

HFI Research, in a Seeking Alpha commentary, says it believes Venezuela sealed its own fate with the arrest of the two Chevron officials because it increases the risk that international oil companies, which have propped up production, will scale back operations with meaningful results. If that happens, the global market deficit is estimated to rise to -1.55 million barrels per day, compared to -0.7 million b/d if Venezuela manages to keep production flat. Other scenarios could widen the supply-demand gap further, such as widespread civil unrest, a full-blown credit default or a shift in government control.

U.S. shale’s impact on prices

Meanwhile in the U.S., big oil and independents continue to ramp-up production in the oil-rich Permian Basin, signaling renewed domestic energy industry vigor. The shale play is expected to hit record output in May — 3.18 million barrels per day, according to the U.S. Energy Information Administration.

Here are a few other metrics of interest from the EIA’s most recent forecast:

  • Brent spot prices will average about $63/b in both 2018 and 2019.
  • West Texas Intermediate (WTI) crude oil prices will average $4/b lower than Brent prices in 2018 and 2019.
  • Total U.S. crude oil production averaged 9.3 million b/d in 2017. EIA projects U.S. crude oil production will average 10.7 million b/d in 2018 — the highest annual average U.S. crude oil production level ever recorded.

CAC’s point of view on prices

Last year we blogged about how the “lower for longer” price of oil was likely near its end because of years of restricted CAPEX and sustained demand in Asia, giving rise to an inevitable squeeze on global supplies.

Today, we are still bullish, and for the same reasons. Free cash flow is the KPI that most producers are using to steer their businesses, not maximized production. The restraint that resulted from limiting capital spend is still in place, but now based on sustaining profitable operations. We expect WTI to be in a trading range anchored at approximately $75 by year-end.

Our view remains that world demand for oil in 2018 and 2019 will be strong and sustained, with continuing upside for producers and the companies that serve them.

We’ll continue to follow the troubling news out of Venezuela and how that could potentially impact future production and prices.

Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including energy infrastructure.