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Oil has reached a ceiling
Stocks may be having a hard time of it this year, but oil is faring better.
Producers will continue to pump despite Opec quotas
(Image credit: baona)
While equities slid, oil had a successful first quarter, gaining around 5% and eclipsing $70 a barrel, a three-year high. Oil prices have now risen for three successive quarters for the first time since 2010. Production cuts agreed by oil exporters' cartel Opec and Russia have helped mop up much of the global glut, as have upward revisions to demand estimates.
Wood Mackenzie, a consultancy, expects demand growth of 1.7 million barrels per day (mbpd) in 2018, the fifth-highest annual figure this century. Meanwhile, political chaos in Opec member country Venezuela has reduced output there, making the Opec cutbacks more effective.
The inventory surplus in the OECD, an association of developed countries, has fallen below 50 million barrels, down from 300 million a year ago, notes OilPrice. Bulls have drawn encouragement from Opec signals that the output-cut agreement with Russia could be extended by another six months to June 2019, while renewed sanctions on Iran following a US withdrawal from the nuclear deal would also curtail global supplies.
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Nonetheless, oil has yet to move decisively beyond $70, and it probably won't. US shale-oil output is still climbing, helping to propel total US output to a fresh record high of 10.4 mbpd last week. And there's more where that came from: the US rig count is close to a three-year high.
Meanwhile, the biggest oil-producing companies and countries have become more efficient, which is lowering their "breakeven" price, JP Morgan's Christian Malek told CNBC; this will fall to approximately $50 by the end of next year, from the mid-$60s now, he reckons. Supplies could also rise because Opec members may be tempted to cheat on their quotas to maximise revenues, as they have often done in the past. The upshot? $70, according to Malek, "is as good as it's going to get".
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Alice grew up in Stockholm and studied at the University of the Arts London, where she gained a first-class BA in Journalism. She has written for several publications in Stockholm and London, and joined MoneyWeek in 2017.
Alice is now Consumer Editor at The Sun and covers everything from energy bills to Social Security.
