With just one more trading session to go in 2017, the price for a barrel of West Texas Intermediate (WTI) crude oil looks as if it will finish the year near $60. That’s good for producers and services firms, as well as pipeline companies and even refiners.
But the average price of a barrel over the course of the year is right around $50 a barrel, about $7 a barrel more than the 2016 average price and just $2.50 a barrel more than the 2015 average. In 2014 the full-year average was $93.25 a barrel. Over the full year, WTI traded in a narrow range of around $9 a barrel, from a low of $42.50 to Friday’s price of just over $60.
The annual average increase can be marked down to increased demand and tighter global supplies. The OPEC-led production cuts have had their intended effect of drawing down inventories and propping up prices. U.S. exports of crude have doubled year over year, due mainly to foreign demand and the higher overseas prices for U.S. crude.
That’s the state of the physical market. In the futures and options market, paper barrels heavily favor continued price increases for oil and petroleum products. Hedge funds and other speculators in oil currently hold nearly nine long contracts for every short position, the widest gulf on record according to oil market analyst John Kemp at Reuters, who also noted that over the past three years this sort of imbalance “has normally preceded a sharp reversal in the price trend.”
In its quarterly survey of energy industry executives published Thursday, the Federal Reserve Bank of Dallas reported that survey respondents expect WTI prices to reach $58.98 by the end of next year. That’s about $2.50 a barrel higher than the price during the time that the survey was being taken (December 13 through 21).
Just over half (51%) of executives surveyed expect rig counts to rise in 2018 and 46% expect counts to remain near current levels. Nearly half (45%) expect “substantial” increase in rig counts if (when) WTI trades between $61 and $65. Only 7% believe prices below $60 a barrel are enough to generate a substantial increase in rig count.
On capital spending, 51% of the executives said their firms will increase capital spending “slightly” year over year in 2018. The better news is that just 7% expect to cut capex next year.
As for where crude oil prices will be in three to five years, the Dallas Fed reported this response:
Expectations centered around $60–$69 per barrel, with the average response across all executives being $66.16 per barrel and a median of $65 per barrel. The most frequent response was $60 per barrel, followed by $65 and $70. Only 11 percent of responses were under $60.
Here are some comments from the survey:
- We believe that the worldwide natural field decline of 5 to 6 percent per year will not be offset by new discoveries or U.S. shale production in the three- to five-year time frame. This belief is driving our expectation of higher oil prices in the early 2020s.
- The ethereal nature of demand is the most important issue we’re currently facing. If perceived demand continues to increase, then prices could move higher. Worldwide economic improvement creates a reason for optimism in higher crude prices. Natural gas, on the other hand, is stuck in a rut for a very long time.
- Electric transportation vehicles and electric rail will drastically decrease the demand for crude oil in the longer term (20 years).
More details are available at the Dallas Fed website.