Why oil may boil in 2018

Brent crude futures, the international benchmark for oil prices, were at $67.29 on Tuesday, the most since May 2015.

The nearly two-year high upswing in oil price came as an unexpected boon for Gulf oil exporters, who now have more reasons to be upbeat about a robust rebound in 2018 and start the year with a bang.
Brent crude futures, the international benchmark for oil prices, were at $67.29 on Tuesday, the most since May 2015.
For the economies of oil-rich GCC countries, which are embarking on new round of bold reforms, including the introduction of value added tax to boost their revenue streams, the pick up in oil price will give added momentum to their expansionary spending agenda and diversification drive.
On January 1, the UAE and Saudi Arabia launched the five per cent VAT regime, which is expected to supplement state coffers to offset the revenue setback caused by a steep price plunge over the past three years.
Analysts at Moody's believe that higher oil prices would benefit the UAE, Kuwait and Oman the most by reducing the current account deficits by an average of four to seven per cent of GDP.
The UAE is among the most strongly-positioned GCC sovereigns in terms of both the size of their financial assets compared to government spending and low fiscal break-even oil prices, while Saudi Arabia, Oman and Bahrain have a higher fiscal break-even oil price along with much lower financial assets on which to draw.
On Wednesday, oil traded near the highest close in more than two years before US government data forecast to show stockpiles extended declines for a seventh week and as unrest continued in Iran, the Opec's third-biggest producer.
US West Texas Intermediate (WTI) crude futures were at $60.87 a barrel at 1241GMT, up 49¢ from their last close and their highest level since June 2015.
Brent crude futures - the international benchmark for oil prices - were at $67 a barrel, up 43¢ but still trailing Tuesday's high of $67.29 that was the most since May 2015.
Traders said the dips followed indications that markets had recently overshot as US production is set to rise further and doubts are emerging about whether demand growth can continue at current levels.
Global demand is expected to rise to 98.45 mbpd in 2018 from 96.94 mbpd in 2017 with demand for Opec crude to rise to 33.4 mbpd from 33 mbpd in 2017.
Lukman Otunuga, research analyst at FXTM, said Tuesday's trading session saw oil prices record their strongest year opening since 2014. WTI Crude ventured above $60.50, inching towards levels not seen since mid-2015 as anti-government protests in Iran continued.
"Supply disruptions, geopolitical risk, and market optimism over Opec- and Russia-led supply cuts could continue to support the upside; but the question is, for how long? Rising production from US Shale producers still poses a threat to higher oil prices, and the upside could face some headwinds down the line. Taking a look at the technical picture, WTI Crude is in an uptrend on the daily charts. The breakout about $60 could encourage a further incline higher towards $62.50," said Otunuga.
Moody's senior vice-president Terry Marshall said all that enthusiasm could start waning this year. Prices for both Brent and WTI will probably be stuck between $40 and $60 a barrel for most of this year as US shale production rises, global supplies remain high and compliance with Opec-led output cuts falters.
"Prices will likely remain range-bound, and possibly volatile, on a combination of increasing US shale production, reduced but still significant global supplies, and potential non-compliance with agreed production cuts - especially if demand growth is more tepid," Marshall said.
There's still upside to the price," said Daniel Hynes, an analyst at Australia & New Zealand Banking Group in Sydney.
"The market is definitely getting a little more positive about supply and demand dynamics. It's highly unlikely we'll see any impact on output from the Iranian protests but it does raise market awareness of rising geopolitical risks."
Oil last year capped a second annual advance as the Opec and its allies trim supply to reduce a global glut. Prices will probably trade between $40 and $60 a barrel this year, penned in by rising US shale production, declining but still hearty worldwide supplies and eroding Opec compliance, according to Moody's Investors Service.
- issacjohn@khaleejtimes.com

Issac John

issacjohn@khaleejtimes.com