Is optimism for $100 oil in 2018 realistic?

It is now almost trite to say that oil prices will never rise above $100 per barrel especially as prices crashed in early 2016 to $27 per barrel. OPEC and 11 of its partners, including Russia, waded in committing to cut output by 1.8 million barrels per day (bpd) between January this year and March 2018 to force a three-year-old overhang of unused oil to drain, thereby boosting prices.

At every oil industry conference, analysts reiterate the need to plan for a future beyond oil, to warn governments of the need to utilise oil resources well or when making fiscal plans.

Oil industry executives have all made preparations to live with the reality of low oil prices in the long-term as $50 oil looks like the new normal. Oil producers too have hedged their products within $50-$60 per bbl to withstand shocks of oil price bust the sort seen in 2016 where oil prices fell to sub $30 per bbl. But what if they are all wrong?

Some investors have been betting on $100 oil for December 2018. Open interest in $100 call options for December has tripped in one week to exceed 30,000 lots, reports Reuters. Open interest in that contract is now equal to the most active contract of the December 2017 options which is set at $60. The $100 December 2018 options is the largest strike for oil in the year.

The indications seem to point that way. Over the past few weeks there have been a stronger-than-expected oil demand growth, and although global oversupply has reduced over the summer, the bets for $100 oil at the end of next year are still way above estimates and forecasts.

Last week oil prices reached $58, its highest since 2015, firmly entering into bull-market territory leading speculations that it will rise further. However there are a few chinks that pose serious threat. Analysts say oil prices will drop if OPEC were to end its production cut deal as planned for March 2018.

In a recent report by Citi, the financial institution said that regardless of what OPEC chooses to about production volumes, supply will likely get tighter next year suggesting that prices would head upward. Similarly, the International Energy Association has also forecasted an oil price spike by 2020 on the back of growing demand for oil that could outstrip the pace of new conventional supply.

Richard Robinson who manages the global energy fund of Ashburton Investments, told Reuters that with inventories soon to balance, the psyche of the market should move and the questions posed by investors will also change. With the dynamics currently in place, he said he expects to witness significant opportunities as the oil price moves higher but was not confident it would get to $100.

While it may easy to dismiss the possibility of oil prices rising as high as $100 due to the threat presented by shale producers to oil prices and fears of parties to the OPEC agreement keeping their own end of the bargain, yet the possibility of higher oil prices does not look to farfetched even if $100 seems remote.

If the current level of crude oil demand is sustained over the next few years, it will more than devour the excess supply on the market. The IEA based its forecast on lack of new investments in the sector and that raises the risk of tightening of the market in the next five years and a risk to the stability of oil prices according to Neil Atkinson, head of the IEA’s oil markets and industry division.

ISAAC ANYAOGU