The murder of Saudi journalist Jamal Khashoggi is a terrifying story and has brought questions about how high oil prices could potentially go. The Saudi's are threatening that U.S. sanctions would be retaliated against, and Saudi Arabia-based Al Arabiya television claims prices could reach "$100, or $200, or even double that figure."
Also pushing up prices, new U.S. sanctions on Iran's oil exports are set for November 4, with a faster-than-expected decline in the country's production pushing Brent prices up over $80 per barrel, versus $70 two months ago. Some 1.7 million b/d could be removed from the global market by the end of the year. Along with Russia, Saudi Arabia itself has indicated that it would compensate for Iran's decline. The U.S.-China trade war and a rising U.S. dollar have also complicated the situation for oil prices.
Oil prices have risen 20-25% this year and some believe that a return to triple-digits is coming soon For reference, Brent prompt month hasn't hit that level since September 8, 2014. WTI hasn't hit it since July 30 of that same year.
It's fair to say that triple-digit oil though would cut into global oil demand growth, potentially pulling prices back down again. Oil product prices in India, for instance, have been soaring to record highs. China has also been increasing product prices. Ditto the U.S.
The International Energy Agency has been reducing its expected demand: "The forecast for demand growth in 2018 and 2019 has been reduced for both years by 110 kb/d to 1.3 mb/d and 1.4 mb/d, respectively." OPEC has been lowering demand forecasts as well. Meanwhile, the U.S. Energy Information Administration's most recent monthly projection put out last week left oil demand for 2019 at the same level as its September projection, even though it increased the forecast for prices by around $2 per barrel.
For Americans, our WTI crude prices are somewhat isolated from international events, namely by comparison to the Brent price that stands as the international benchmark. Yet, I would caution against taking too much comfort in that fact. Oil is indeed sold on an international oil market and global prices are co-integrated.
It's interesting to note that U.S. oil prices are up despite domestic production surging to record highs, rising 20% this year. Now, EIA's latest forecast has 2019 U.S. crude oil production going to 11.76 million b/d, slightly higher than the 11.50 million b/d that it projected last month. The U.S. Secretary of the Interior Ryan Zinke just said that we could hit 14 million b/d by 2020.
The widening Brent-WTI spread helps the prospects for U.S. crude exports, at 2.313 million b/d over the past three weeks. This is nearly a 50% boom from the August average and the second highest three week stretch in U.S. history. EIA puts the Brent-WTI spread at $6.50 next year or so, with our exports in solid shape when the gap is at least $3.00.
I guess I have to answer the question at some point.
I put my 2019 average Brent forecast in the $73 to $80 range, with a $5 to $7 premium over WTI.
Date: Oct 18, 2018