Oil Prices Highest in Three Years – Can it Continue?

  • The price of Brent crude rose nearly 30% in 2017

  • OPEC and 10 members outside of the cartel continue to reduce production

  • Expanded shale oil production could affect prices globally

The US Energy Information Administration showed that the US stockpile of crude fell another five million barrels in the week ending January 5 – over one million barrels more than experts predicted. This makes it the eighth consecutive week that crude stockpiles in America have declined.

According to the same reports, last year was the first since 2013 that global petroleum and other liquid fuel inventories fell. Analysts, like those at Commerzbank, believe this trend will continue. “In view of sharply falling U.S. crude stocks and record-high compliance with the production cuts by OPEC, market participants are convinced that the market is continuing to tighten.”

The Wall Street Journal reported that other experts expect “oil demand growth [will] outpace supply growth from non-OPEC countries” for the next two years. This expectation is a major reason why oil prices are at their highest levels in 3 years.

Presently, American gasoline and distillate inventories continue to rise. It appears that the market assumes higher oil prices will facilitate more shale oil production. And as oil prices remain higher, it is likely that there will be greater action in plays that were once cost-prohibitive.

At the end of 2017, Goldman Sachs raised its own forecast for 2018 oil prices. Their analysis stated that the risks of an overtightened market were less than the possibility of a price boom. They did go on to warn their investors that there would be a noticeable response of shale oil and other producers in response to those higher prices. New players, analysts warned, would likely incentivize OPEC and Russia to change their production agreement.

Perhaps the most-telling of all these indicators, though, is the time that this oil price spike is occuring. Oil and gas prices have a rather noticeable seasonal swing. Futures traders, in anticipation of summer travel seasons, push prices upward in the spring. Those same prices also fall in the autumn after vacation/driving season is over. This latest boom is happening outside of that traditional window, however.

The price of oil is also tied to the strength of the U.S. Dollar, as most oil-exporting countries conduct their foreign business in that currency. As the dollar weakens, its buying power is reduced, causing oil prices to increase. This inverse relationship may cause higher prices in the near future as an indirect result of a rumored government shutdown.

In conclusion, higher oil prices are likely to remain high in the short term. Instability in Washington could inadvertently raise prices further. The strong prices may incentivize OPEC and its comrades to continue their production-cutting measures. In turn, this will foster more opportunities for oil shale-produced hydrocarbons, will increase domestic energy independence, and will continue to be an important factor in the American economy.