Why oil is really rising and outlook for 2018

Oil industry analyst Malcolm Graham-Wood tells us why oil prices are really surging and what will drive sentiment this year.

The oil price is up almost 20% in one year to 2015 levels. Is this sustainable?

It is sustainable, but I'm expecting 2018 to be another bumpy ride. I mean the 20% we've had this year [2017], we've had $44 a barrel back in June, and $66 a barrel last week. So, you know, I'm expecting another bumpy ride, and that's partly because I expect the first half of the year, as it is most years, to provide…demand to be down, in which the OPEC and non-OPEC agreement will have to be absolutely rock solid.

It'll get better as the second half of the year comes along because demand will pick up and that should naturally take the place. So, OPEC and non-OPEC will be, I imagine, starting to talk during the middle of next year [2018] about when they can wind down those curbs a bit. But if they go too early, and realise that it'll [watch]…I think supply and demand has never been more important, and if they don't watch out for non-OPEC suppliers from the US and shale, for example, which I don't think is going to be too important, but it will be important at the marginal barrel.

So, they are going to have to make sure that they keep production strictly under control, or they won't be able to take the advantage of the second half of the year.

You tipped oil to hit $60 by year-end. It did. What's your target for 2018?

Well, tipping it to end 2017 at $60 was…it might have been a bit of a fluke actually because right in the middle of the summer when it was $45, I wasn't overly confident. But I'm always confident that the second half of the year is better for demand than the first half, which is why I haven't got much of an increase in for the first half of next year [2017], if anything at all I would expect it to be…it might be $60/65 in the first half of the year. And if, and only if the supply curbs are maintained, then it should go a bit higher next year towards the end of year. So, I've got $70 pencilled in for the end of the year, subject to OPEC and non-OPEC discipline.

What will be the main themes for oil in 2018?

Well, for 2018 I'm expecting the same, the usual themes to be coming through. Obviously, it's very important with GDP picking up in a number of Western countries I expect the demand side to be reasonably solid. I'm expecting the US, Europe, and to a larger extent India, and later in the year I expect to see some pick up in demand in China. So, the demand side doesn't look too bad.

Supply side, as I've been going on about, it's very much if the OPEC and non-OPEC curbs can be kept, and if they do that, and they get all the way through to say June and it looks okay in June, then it won't be so bad. Of course, there are always other supply problems on the plus and the minus side. The biggest worry on non-OPEC supply is obviously US and shale, and as long as it's north of 50 bucks, you know, they'll be continuing to produce…drill more wells, which won't help things.

On the other hand, I'm expecting the usual geopolitical problems to come in. Don't forget we've already got problems in Libya, which I expect to get worse. Nigeria has elections in the beginning of next year [2017], and we're already seeing a little bit of terrorist activity down there.

And of course, Venezuela, which has been, you know, not much short of a basket case in recent months, they are supported a little bit by Russia and China at the moment, but I wouldn't expect that to last for too long. So, you know, there are a number of areas where I expect supply to have problems.

And the biggest risk?

The biggest risks are what might be called the unknowns, and they always are. I mean we've seen things happen in the last few months that have helped pushed the oil price up in this last quarter, and that's been the keystone pipeline in North America, and of course in the last few days we've seen the Forties pipeline. The UK isn't a huge producer, but 400,000 barrels a day interruption from the UK, in what is a very important market price, the Brent price, it has had it's own effects, and so in those, you know, the unknowns are going to be as important as anything else.

I think that next year's [2017's] problems, some of them we won't even know about yet. But in terms of supply, if we have any material cut back in supply from any of the bigger producers, that's going to be where your problem might be.

This is the transcript of a video filmed in December. To watch the original video, please click here.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.