'Shale to the chief' to be Trump's entry music

Oil prices are likely to rise in 2017, but how far and how fast?

Donald Trump
President Trump is bound to be bullish for US shale producers, as tariffs on oil imports could be a target

Oil producers will be happily bidding farewell to 2016 as they look forward with great hope to a stronger year ahead and the prospect of a rebalanced energy market.

In slow trading on the final Friday of the year, Brent crude was holding around US$57 with WTI close to US$54 a barrel.

The oil price volatility experienced in the past year might have been a joy for traders, but producers remained uncomfortable throughout. WTI alone has had swings from as low as US$26 a barrel to above US$54.50 a barrel, a gain of more than 45% in one year.

The oil price began the year at a 12-year low and while it ended in much more positive territory, the jury is still out on where it might go in 2017. Much of the recent gain has come from the agreement at the late November OPEC meeting in Vienna where OPEC and non-OPEC producers agreed to reduce oil output.

“Oil prices are likely to rise in 2017,” said Jason Schenker, president of Prestige Economics and added that “under-investment poses upside oil price risks at the end of 2017 and in 2018.” Most investment banks are hoping for a sense of stability and the rallying cry for a near US$60 price average is being touted about.

A stronger price will be appealing to the US shale industry that had lost its lustre in a low price environment. The rig count is on the way back and Citibank estimates that an oil price of US$70 could tempt American producers to add an additional million barrels a day to the market. That would cancel out the recent efforts from OPEC and non-OPEC and possibly set the price merry-go-round off again. The incoming presidential regime of President Trump is bound to be bullish for US shale producers, as tariffs on imports could also be a target to help the domestic energy industry.

The US currently produces around 8.8 million barrels a day with around 50% coming from shale production. Exports of crude and refined petroleum products are currently at around 6.5 million barrels a day. Citibank estimates a holding period of US$60 a barrel can quickly add 500,000 barrels a day to the market.

In a Bloomberg interview, CEO of Continental, Harold Hamm cautioned that the market “could be in for another one of these price adjustments if we get carried away with development.”

The American benchmark has traded at an average US$52 a barrel since OPEC agreed its production cut in late November. In a Bloomberg Intelligence index of 57 independent US oil and gas drillers, percentage gains have been encouraging at the end of the year and the prospects for a return to profit among key energy players is the sentiment for 2017.

Data from the Energy Information Administration saw US crude stocks increase by 614,000 barrels last week and the activity in new working oil rigs was up by 82 in the two-month period just before the Christmas break. As we close the year, US inventories are still at their highest seasonal level in more than three decades.

The big challenges to a sustained return of strength in the oil price will be the much-needed compliance to the agreed OPEC cuts to take effect from next week, the beginning of January 2017.

A Reuters poll also sees a possible return to US$60 a barrel as market fundamentals improve. The poll estimates quarter on quarter price increases for crude, but cautions about the return of US production and the strength of the dollar as additional possible limiting factors.

The easing of geopolitical tensions in Iraq, Libya and Nigeria could also add more oil to the market in the coming months. These countries are exempt from the OPEC agreement as they have suffered severe cutbacks due to warring factions preventing production in recent years and again in recent months. Already Libya’s oil production is around 625,000 barrels a day, but political instability remains in the country with little sign of an absolute agreement. The Libyan National Oil Company says the re-opening of key pipelines could add an additional 270,000 barrels a day in the first quarter of 2017.

With optimism abounding for a more profitable year in 2017, oil inventories around the world remain above the five-year average, with no real hope of a swift draw-down until the second quarter. The benchmarks may be looking healthy as we approach the new year, but it’s now critical that the market sees strict adherence to the agreed OPEC production cuts in the coming weeks. That’s what will be needed to get the new and hopefully improved year for the oil market off to a better start.

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