2018 Oil Market Predictions

As the industry breathes a collective sigh of relief we’re all asking the same question – now what?

The global upstream industry has stabilized – that is for sure. The IOCs are returning to financial health and back to paying dividends. The global crude storage oversupply issue is now half way resolved and expected to return to its five year average in 2018. And the shale industry is now much more disciplined in paying just as much attention to investor returns as they are production.

The industry is now settling into a new normal. The market is called down, much less volatile and much more stable. WTI has been trading above $50 USD for a sustained period and it is now time to raise price forecast expectations for 2018. Just this past October I was still forecasting $45 to $55 as a trading range and the market has certainly blown past that. More to the point, the producers are all returning to the black after multiple quarters of hemorrhaging cash and the U.S. investor community (ie, Wall street and Equity Funds) is now exercising financial discipline over the shale market - no more easy money. The gung ho days of drill baby drill are over - at least for now. The market is calmer, more rational, and much more stable as we enter 2018.

As the producers focus on near term shareholder returns this unfortunately means another year of minimal CAPEX investment – especially for the long cycle projects. Shale remains the focus du jour and we can expect U.S. production to exceed 10 million bpd with a focus on short cycle projects. OPEC and Russia have all but ceded the market (for incremental production) in 2018 to shale as being the swing / marginal cost producer. Long cycle projects - Gulf of Mexico, Offshore Mexico, Offshore Brazil will continue to be largely back burnered until they can be economically justified. Brent will have to be trading consistently in the $70s for this to happen.

And of course those 1.8 million barrels from OPEC and Russia will find their way back into the market - hopefully in a steady trickle and not a flood when we reach the five year crude storage average. These 1.8 million barrels are the industry's effective price cap and it will likely take a couple of years for the market to absorb this supply. For this reason I have a hard time seeing Brent go over $70 for at least the next 24 months unless there are some significant disruptions to the supply market.

Where does this leave the oil field service companies with whom the producers are dependent on driving production? It will be a slow crawl back to profitability as the industry continues to whittle through over capacity and I suspect 2018 will be another tough year. The big oil service companies will bounce back first and the rest of the market will follow. I once heard that oil service company profitability lags producer profitability after a downturn – so we shouldn’t see a notable return to profitability (and jobs) in this sector until perhaps starting in 2019. But the market is definitely on the upswing, the asset fire sales are over, we are recovering, it is just a very slow process.

We all now know that this was not a normal cycle. This downturn was all about technological disruption. But it wasn't shale that caused the down cycle - it was OPEC's (primarily Saudi Arabia's) decision to flood the market in response to shale (to kill it) and the market will never quite be the same. I’ll leave you with this one chart that shows just how much the market has changed - U.S. import trends - and on the same note a second graph depicting U.S. exports of petroleum products. These trends would have occurred anyway but unfortunately we all experienced significant pain from OPEC's reaction to the technological innovation. Lesson learned. You can't stop technological change - you have to get ahead of it.

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Peter Armstrong is a Principal with Armstrong Marketing Strategies, a B2B “sales results oriented” marketing and business development consultancy and services firm. Our services are offered on a fractional CMO or BD Executive basis or by project. We specialize in inbound marketing / marketing automation (either as an internally supported or outsourced solution) and formulating distinctive go-to-market strategies. Expertise spans branding, messaging, market research, web development, product marketing, new product development, trade show execution, sales force optimization, and solution selling sales training.

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