PORTLAND
MARKET
REPORT
February update
Here we are at the beginning of another
year, which must mean that it is time to get
out Portland’s Oil Price Crystal Ball! Before
that though, let’s look at what we predicted
in January 2017 and see how our forecasts
fared. This time last year, we said that “most
pointers indicated another year of price rises”
and that we would see “a consistent edging
up of the cost of oil to $65 per barrel”. Oh yes!
The average price of oil in December 2017 was
$63.94 per barrel and by the fi nal day of the
year (Dec 29th), it had reached $66.87 (cue
huge applause, award for Best Oil Company
in Central York and a spike in new-born babies
called Portland). This means that Portland has
correctly forecast the price of oil for the last
three years in a row and hopefully fi nally buries
the calamity of 2014. Back then we said that
prices would be “generally stable”, a forecast
that turned out to be around $75 a barrel
out…!
‘LAST YEAR THE WORLD
CONSUMED MORE OIL
(97 MILLION BARRELS
PER DAY) THAN IN ANY
OTHER YEAR IN HISTORY
AND THAT RECORD WILL
BE BROKEN AGAIN IN
2018 - WITH A FURTHER
INCREASE OF CIRCA 2M
BARRELS PER DAY’
But where are things heading in 2018?
Conventional wisdom would tell us that
for each month of price rises, the chances
of another major price crash increases in
likelihood. After all, oil prices are cyclical and
therefore a downward correction in prices
may now be due. But whilst this may be the
case at some point in the future (2019?),
our perception of the market at the moment
is “not just yet”. The main factor here is the
‘DEMAND WAS THE DOMINANT
FACTOR IN 2017 AND WE PREDICT
THAT THIS WILL BE THE CASE
AGAIN IN 2018’
ongoing inability of the shale industry to move
as quickly as it has done in the past. Many of
t he original shale operators from the 2014-
15 price crash have already gone bust and
replacement companies have only slowly been
fi lling the void. And of those original companies
that managed to survive 2014-15, virtually
all are signifi cantly in debt, having borrowed
heavily to stay in business. Then last year, the
US Federal Reserve raised interest rates on two
separate occasions (by a total of 0.5%). This
effectively meant that debt repayments for the
shalers doubled and this has clearly curtailed
both production on existing wells and plans for
the drilling of new wells.
It is also worth noting that back in 2014,
the shale industry was a notable bright spot
in the US economy. But the US in 2018 is
booming across the board and this means that
shale now has to compete with other sectors
for both investment and labour. On the cash
side, this presents a “double-whammy” effect,
in that not only does it cost more to borrow
(because of higher interest rates), but getting
the cash in the fi rst place is that much more
diffi cult. For lenders and investors, non-oil
parts of the US economy now offer lower risk,
potentially greater, and certainly less cyclical,
prospects for growth. To add insult to injury,
non-oil is now luring shale oil workers with jobs
that are well paid, more secure and invariably
less harsh in terms of working conditions. No
wonder that pay rates within the shale industry
increased by 20% in 2017 to meet this
challenge - a trend we see continuing in 2018.
‘WE HAVE TO RULE
OUT SHALE AS A
MAJOR FACTOR IN
PUSHING PRICES BACK
DOWNWARDS’
All of which means that we have to rule
out shale as a major factor in pushing prices
back downwards. And it is diffi cult to see how
conventional oil exploration will do that job
either, particularly following OPEC’s decision
to maintain their production cap throughout
2018. As for non-OPEC volume and the Oil
Majors, much of their focus has already
(permanently?) switched from oil to gas (and
to a lesser extent renewables). Plus we know
that conventional oil exploration requires
long-term fi nancing and that since 2014,
investment in traditional oil projects has fallen
annually by 25%. Put simply, in the recent low
price environment, the focus of Big Oil was on
cost-cutting and not new projects.
No sector of the oil industry then, seems
able or desirous to increase production
and send prices southwards. In the period
2014 – 2016, it was supply and not demand
that dominated the oil price landscape. But
demand was the dominant factor in 2017
and we predict that this will be the case again
in 2018. Last year the world consumed more
oil (97 million barrels per day) than in any
other year in history and that record will be
broken again in 2018 (with a further increase
of circa 2m barrels per day). These annual
increases in demand are nothing new - global
oil consumption has gone up every single year
since the 2008 fi nancial crisis – but from 2014
to 2016, bounteous oil supplies easily absorbed
this demand growth. This was not the case
in 2017 and nor do we see it being the case
over the next 12 months, providing us with
the backdrop for our bullish outlook in 2018.
Making exact predictions for the oil price is
always a perilous game, but with today’s price
at $70 per barrel, we conclude that a price of
$85 is signifi cantly more likely than a price of
$55, come the end of this year.
For more pricing
information, see
page 26
Portland Fuel Price Protection
www.portland-fuel-price-protection.com
Fuel Oil News | February 2018 13