FRAMINGHAM, Mass. -- The surprise of 2017 was that oil markets remained under pressure despite all the blustering from the Organization of the Petroleum Exporting Countries (OPEC) and the significant economic recovery in the United States and the rest of the world.
Also surprising to some was that oil prices never collapsed and found a bottom at $30 per barrel for West Texas Intermediate (WTI) and $45 for Brent. With WTI now about $57 and Brent $63 per barrel, what do we see for 2018?
Here are my predictions for petroleum demand, supply, margins and more in the coming new year ...
World oil demand has no doubt recovered and is strong. In China, despite some softness, demand will be up 4 million barrels per day (bpd) and the other Asian tigers will be up 6 million bpd. North America will be up 2 million bpd, primarily led by the strong U.S. recovery and 9 million-bpd gasoline demand. Overall, world demand will reach 100 million bpd. 2017 saw world demand at about 98 million bpd.
Despite the bluster from OPEC, its production remains at 35 million bpd. Every indication is that leakage and current prices, along with the Saudi and Iranian fear that oil is worth more today as cash reserves for an uncertain future, has actual production closer to 40 million bpd, with a likely increase to 45 million bpd.
Higher prices and, more important, lower prices for finding and extracting oil have caused non-OPEC production to ramp up to 60 million bpd from 55 million bpd in 2017. Most of that increase has come from North America, but it is important to note that Chinese, Vietnamese and Korean production from the South China Sea has grown by 1 million bpd.
But more important, the South China Sea, which has proven oil reserves of 8 billion barrels of oil alone, is worth watching as a geopolitical flashpoint among both Koreas, Vietnam, China, Taiwan and the Philippines. (It is refreshing that the Mideast will recede to the background for a while.)
Of course, the oil market never suffers from geopolitical ennui for long. Potential concerns are:
- Venezuela (a collapse is certain)
- Mexico (a lack of capital investment and government ineptitude)
- Russia sanctions (its capacity is 1 million bpd)
If Rex Tillerson leaves as U.S. Secretary of State, there is a better than 50-50 chance the sanctions will be eased, moving Russia away from OPEC and bringing the king of all cheaters into the supply of world oil (assuming Michael Flynn does not have photos of President Trump dancing cheek to cheek with Putin).
Throw the ever-exciting and inept Nigeria into the mix and these issues will be the triggers for upside price moves, but these moves will be moderate and temporary. WTI will have a range of $50 to $75, with an average price of $63 per barrel in 2018 (vs. $58 in 2017).
Refining margins and refiner prospects should improve given cheap natural gas as a feedstock, some consolidation and other cost improvements. Gasoline cracks at $18 and diesel cracks at $16 will be the mean, making gasoline $1.95 per gallon and diesel $1.90 per gallon, cash, wholesale.
With wholesale terminaling, pipeline and trucking costs of 25 cents per gallon (CPG), retail margins of 17 CPG and state and federal taxes of 47 CPG, we will see national average gasoline prices of $2.84 for the year, moving within a range of $2.45 to $2.95.
More certain bets
Other certain bets for 2018 are:
- An increase in state and federal fuel taxes.
- Controversial tweets from President Trump.
- Another Hollywood bigwig caught being inappropriate.
- The collapse of the Bernie Sanders Test Kitchen (Venezuela).
- OPEC and Russia cheating on production cuts while talking strong. (Their resolutions are on par with my New Year’s weight and healthy living resolutions.)
- Increasing U.S. exports of refined products. (We are the world’s swing producer.)
- Higher electricity prices (maybe very high).
- Better retail fuel margins (consolidation and disappearance of the weak seller).
- More ethanol and DEF use.
- Weaker natural-gas prices but more states deregulating.
- Talking financial heads will say the Dow at 26,000 is reaching a top.
- Patriots win the Super Bowl.