Consensus sees oil prices strengthening in 2018

Gulf producers such as Saudi Arabia often play it safe when planning state budgets, lowballing the oil price they use.
Sunday 28/01/2018
Shifting risks. Omani Energy Minister Mohammed bin Hamad al-Rumhi (L), OPEC Secretary-General Mohammed Barkindo (C) and Saudi Energy Minister Khalid al-Falih attend the seventh Meeting of the Joint Ministerial Monitoring Committee in Muscat, on January 21.   (AFP)
Shifting risks. Omani Energy Minister Mohammed bin Hamad al-Rumhi (L), OPEC Secretary-General Mohammed Barkindo (C) and Saudi Energy Minister Khalid al-Falih attend the seventh Meeting of the Joint Ministerial Monitoring Committee in Muscat, on January 21

WASHINGTON - A ccurately predicting how oil prices will fare in 2018 is like reading tea leaves: sifting through global supply/demand scenarios, factoring in weather forecasts and debating how political events in key producing countries could affect price levels. Not surprisingly, price forecasts by energy analysts, banks and government agencies can vary widely and often are adjusted as new data become available.

Another indicator is the oil price that Gulf Cooperation Council (GCC) producers choose when preparing their annual budgets, as their finances are keenly tied to oil-based revenues.

Oil prices in recent months have strengthened to $65-$70 a barrel on healthy demand expectations and global crude inventories that are falling sharply thanks to restrained output from key oil producers. For 2017, UK benchmark Brent crude averaged $54 a barrel, a nearly $10 jump from 2016 levels, while US benchmark West Texas Intermediate (WTI) averaged close to $51 a barrel, up more than $7 from its 2016 performance.

The US Department of Energy’s Energy Information Administration (EIA) recently forecast that Brent crude price would average $60 a barrel and WTI $56 a barrel in 2018. Echoing the EIA’s price assessment for the year, a Reuters polling of energy economists and analysts in December forecast that prices in 2018 for Brent and WTI would average $59.88 a barrel and $55.78 a barrel, respectively.

These prices were adjusted up about $1 a barrel from polling immediately following the November 30 decision by OPEC members and independent producers to extend a 1.8 million barrel per day (bpd) production cut agreement through 2018. Saudi Oil Minister Khalid al-Falih and his Russian counterpart Alexander Novak hinted in a January 22 joint interview that the agreement could be carried into 2019 if the oil market does not balance by then.

Citing the better-than-expected adherence to production cuts as well as a faster tightening of a long over-supplied oil market, several banks are rethinking their price forecasts for 2018. Analysts from Bank of America Merrill Lynch recently upped their forecast price of Brent to $64 per barrel in 2018 from their earlier forecast of $56, while boosting their estimate for WTI from $52 per barrel to $60.

An analyst with Morgan Stanley, pointing to strong capital flows entering the oil market in 2018, has bumped his forecast for Brent to $75 a barrel in the third quarter of the year, up $12 from his previous estimate. While Goldman Sachs is sticking with its predictions of Brent to average $62 a barrel and WTI to average $57.50 a barrel in 2018, the bank notes that there is a growing risk that global oil stockpiles will shrink too quickly, prompting prices to jump.

Gulf producers such as Saudi Arabia often play it safe when planning state budgets, lowballing the oil price they use so that if prices average higher they come out with better returns at the close of the year. Riyadh, which has forecast a 2018 deficit of $52 billion, is believed to have based its current budget on an average price of Brent of $51-$55 per barrel. Should Brent trend at $60 a barrel or higher in 2018, the kingdom could see its budget deficit shaved considerably.

The International Monetary Fund (IMF) said Saudi Arabia’s “break-even price” to balance its budget in 2018 is an average of $70 per barrel. The IMF noted that the Saudis have made great strides in reducing that break-even price from 2016’s $96.60 and 2017’s $73.10. Riyadh has shifted its target for balancing its budget from 2020 to 2023 as it focuses on implementing fiscal reforms.

The IMF weighed in on budget expectations for several other Gulf producers, noting that Kuwait and Qatar should have no problem balancing their budgets in 2018 as their break-even prices will be below the expected average oil prices for the year. The Kuwaiti and Qatari governments have based their most recent budgets on an average oil price of $45 per barrel, certainly well below industry predictions for the year. The United Arab Emirates, in reducing its break-even price from $60 per barrel last year to $58 this year, is anticipating a balanced budget for 2018.

While the predictions of higher oil prices may be exactly what Gulf countries want to hear in terms of their budgets, there is a risk that higher prices could translate into larger output from other oil producers not committed to production restraint, causing a drag on prices.

The International Energy Agency (IEA), in its latest monthly report, addressed the fact that increasing prices in 2017 have spurred US shale production. The IEA stated that, “The big 2018 supply story is unfolding in the Americas,” pointing to “explosive growth in the United States and substantial gains in Canada and Brazil” that are expected to overshadow steep output declines from other producers.

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