The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is up more than 8% over the past month and nearly 16% since the start of the fourth quarter, but some market observers challenges await oil in 2018.
Saudi Arabia is the largest producer and kingpin in the Organization of Petroleum Exporting Countries (OPEC). For its part, OPEC remains concerned about the level of production by U.S. shale producers and the cartel is urging its U.S. rivals to pare output to support prices. According to the Energy Information Administration, crude oil product could hit 9.9 million barrels per day in 2018, which surpasses the prior high reached in 1970 of 9.6 million barrels per day.
OPEC meets later this month and that meeting could set the stage for oil’s performance in early 2018.
“This time around, the market rebalancing has occurred and oil has rallied ahead of the meeting. Brent crude, the global benchmark for oil prices, hit a 2.5-year high earlier this month,” according to BlackRock. “We could see limited upward price movement if OPEC proceeds as expected and downside risk to oil prices if no extension is announced.”
Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. While demand has yet to catch up to elevated supplies, rebounding economies in Europe and steady economic growth in the U.S. could at least keep oil prices steady around current levels in the second half of 2017.
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“But we see reasons to believe price gains will moderate even with an OPEC extension,” said BlacRock. “Major global oil agencies predict non-OPEC supply will rise next year, pressuring oil prices. Increased hedging activity in the futures market by U.S. shale producers may signal an intent to ramp up production, we believe. A clearing up of logistical bottlenecks caused by recent hurricanes should also boost U.S. oil exports, increasing global supply.”
While the Organization of Petroleum Exporting Countries have moved to cut production, expectations of continued U.S. shale production remain a deterring factor. Nevertheless, recent U.S. inventory drawdowns, which if sustained, could support the current price levels.
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