Gazing into the Energy Crystal Ball for 2018

FILE PICTURE

Oil production in Kazakhstan. The former Soviet republic could bring more oil into the market over the coming years.

Gazing into the Energy Crystal Ball for 2018


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This content is part of ‘Our World’ (February 2018).

In 2018, crude oil prices are likely to move between $55 to $70 per barrel depending on the geopolitical tensions but also on whether an ongoing deal between the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC members to cut production holds as rising US shale production may prompt Russian companies to boost output to defend their market share.

NE-101-2Chris Weafer, a partner at Macro-Advisory in Moscow, told New Europe that if the threats do not materialise and the market quickly gets used to them, the oil price would remain at current levels. If US shale recovers rapidly then, prices would slide back towards $55 per barrel. “If the US output remains very modest and the threats remain very credible or we see new threats then I would say 65 to 70,” he said.

Weafer said he expects to see more Russian output in the second half of the year because the Russian companies are losing patience with having to restrain their new projects.

“If the Russian oil companies see US output growing and gaining market share, then they will move on with their projects, they will not be restrained by the government any longer. They have made that clear that they are holding back on new projects because the price of oil is high. But their senior executives have all made it clear that if they start to see US companies benefiting from the higher oil price and therefore risking the future oil price, then they will come in quickly with their new projects and, of course, that will guarantee that the price will go down,” Weafer said.

A recovery in US oil production after a recent drop contributed to the recovery of oil prices. “US shale has adapted from the much lower price to find themselves profitable at these levels,” Justin Urquhart Stewart, director at Seven Investment Management in London, told New Europe.

“Whether that means a significance increase in production or not, I can’t see that necessarily. Actually at the moment it seems profitable at these levels but to start new shale operations, increasing production would be quite expensive. So I think we already had the shale increase at the moment unless we have a significant expansion and I’m not see where this would come from,” Urquhart Stewart added.

Meanwhile, Weafer noted that Kazakhstan has been incorrectly regarded as being a fringe player and being ignored and that really isn’t the case anymore since the massive Kashagan field started pumping oil in late 2016.

“That project is now viable and is improving so after years and years of failure and breakdowns. It’s up to 250,000 barrels a day on average and should get up to about 400,000 barrels a day by the summer whereas a lot of traders have forgotten that this field is now growing and is working,” Weafer said.

The Macro-Advisory partner noted that US energy giant Chevron is planning approximately a $36 billion expansion of the giant Tengiz field in Kazakhstan, which would bring more oil into the market over the coming years.

“You’re seeing strong growth in countries like Kazakhstan, which they could easily add a million barrels in the next few years over what it was producing say two years ago,” Weafer said.

He also noted that the Russian companies are becoming a lot more efficient benefiting from the low ruble and “they have new production they are keen to bring on if they see US shale rising”.

Weafer noted, however, that the deal between OPEC and non-OPEC producers, especially Russia, to cut oil production is holding for now. “The Kremlin is playing both politics as well as economics and the political relationship in particular is very important for the Kremlin.

They have for the first time in history been able to establish a good relationship with the Saudis and they see that as very important verses geopolitical strategy in the years ahead,” Weafer said, adding that “the Kremlin was willing to twist the arms of the oil executives to comply” with the deal and ultimately benefit from the higher price.

“Clearly the Kremlin wants this deal to continue because for them it is very good politics having this arrangement with the Saudis and having this improved relationship with Saudi Arabia. It helps Russia refocus its geopolitical strategy away from the West towards a more global diversification the Middle East, Asia and elsewhere,” Weafer said.

Urquhart Stewart said, “It’s fascinating that the policies that we had of this year where the agreement between OPEC and Russia had broadly been sustained would mean that actually the price should stay roughly where it is. However, it’s interesting to see that the outages from Libya and also from the Forties field have pushed the price up. It just shows how sensitive it is.

If the global economy keeps on growing at the current rate – and there’s a good reason to think that it will do – actually there’s going to be sustainability to the oil price. I can’t see a push up to 80, but I can see it standing at mid 50s with spikes up into the mid 60s”.

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