Global demand to drive oil prices higher in 2018
Forecasts are being made across the oil industry into what price oil will achieve next year. Whether you believe oil will rise will remain level or rise to $80, it is global demand for oil that acts as the primary catalyst for increasing oil prices in the short term. Recent forecasts on demand levels by OPEC are suggesting a strong year ahead.
Image: OPEC headquarters
Since OPEC and non-OPEC members extend oil production cuts until the end of 2018, the main focus has now shifted to worldwide oil demand and the production of shale oil. Demand is looking strong for the year ahead and experts believe that shale investments will decrease slightly.
Like all commodities, oil is bought and not sold, which means oil demand is the most important factor influencing prices in the short term. The prediction by OPEC is largely based on a stronger, more prosperous economic outlook, with major economies showing stronger and stable rates of growth.
A strong signal for economic growth and its impact on oil prices are purchasing manufacturing indices (PMIs). These indices have been expanding and are a positive sign for oil prices. The eurozone manufacturing PMI has been significant, reading the highest rate since 2000, and second highest level in history.
The biggest concern to OPEC is the resurgence of the shale oil industry. However, analysts believe they should not be concerned with the ‘boom’ in the USA shale market, pointing to the fact that many drillers are particularly cautious after the market downturn and this will hinder the development.
The hedging of shale oil prices will continue as shale oil drilling continues to incentivize higher levels of drilling activity.
If current trends continue, oil prices could potentially continue to rise and drilling activity will increase. Strong global economic growth, combined with Saudi Arabia introducing a risk premium to oil prices could potentially send Brent oil prices closer to $70 next year.
The former chairman of Goldman Sachs Asset Management, Jim O’Neil believes that oil prices will not stagnate next year around the $60 level, pointing towards the increase rate of global economic growth.
Whilst many nations that do rely on oil are looking to reduce their reliance on oil, O’Neil believes the transition to cleaner energy is unlikely to happen fast and so in the short term the oil market is adjusting to higher demand levels.
Brent spot prices have recently increased past the initial five-year forward price which implies that a trend change may be developing next year.
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