Cannabis is getting all the headlines. It’s everywhere. Heck, I think I’m getting a contact high just from hearing about cannabis stocks.
But while cannabis controls media attention, crude is going to be the big winner for 2018.
Oil prices started the year trading under $60 per barrel. They have increased to around $75 today. And with U.S. sanctions against Iranian oil nearing, the rally isn’t over.
Some say oil prices will pop over $100 per barrel again.
Trump has given nations until November 5th to stop importing oil from Iran. And if they refuse, they’ll face sanctions from the United States. The goal is to stop Iran from using oil revenue to finance its nuclear programs. Or at least that’s Washington’s stated goal.
Either way, Trump’s sanctions could mean a serious cut to global oil supplies. Iran is one of the world’s leading oil producers. And no country really wants to be on Trump’s bad side.
The market first estimated Iranian sanctions would cut 300K to 700K barrels of oil per day (bpd) from world output. But analysts say oil exports from Iran have dropped 580K bpd in the past three months leading up to the November deadline. Washington’s plan is already working. And it’s working well.
The market now suspects sanctions could disrupt up to 2 million bpd from global supplies. Problem is, the world doesn’t have a way to supplement that lost supply.
The largest source of new global oil supplies over the past decade has been U.S. shale. This is due to new extraction technologies like fracking. But American shale is going through some growing pains.
Pipeline bottlenecks, workforce issues, and declining CAPEX are all hampering growth. U.S. shale supply growth is expected to fall to 1 million bpd in 2019. That’s compared to 1.4 million bpd this year. So even though American oil production is at an all-time high, output won’t make up for global supply loss.
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Other OPEC members could promise increases to output. But their ability to boost production is also limited. And it’s unlikely that OPEC would spend the money to increase output by another 2 million bpd. Iran’s oil isn’t disappearing from the market forever. Nations importing Iranian oil are just being sanctioned for a term. There’s no telling what the next administration will do.
So it seems Washington’s sanctions will have a significant effect on global supplies. At least in the short term.
Meanwhile, demand remains strong. The IEA puts world oil demand growth for 2018 at 1.4 million bpd and up to 1.5 million bpd next year. According to OPEC’s Secretary General, global oil consumption will hit 100 million bpd this year. That’s much sooner than previously expected.
Cuts to global supplies and healthy demand are leading some investors to believe oil prices will again cross $100. Will they?
For us, it doesn’t really matter.
Yes, it would be great for energy investors if oil reached $100. But it’s just a number.
What’s more important to us is that oil prices are still trending higher. $100 per barrel, $90 per barrel… it doesn’t really matter. From $75 per barrel, we’re still set to make decent money.
The November sanctions probably will continue to drive oil prices higher. But I suspect it will be a media-driven rally and could be short-lived. By Thanksgiving, the market will have likely moved on to the next crisis. In other words, if oil does go to $100 per barrel, I think it will still end the year closer to $80.
Over the medium term, we’re still very bullish on oil. Technologies like electric vehicles threaten to disrupt the oil industry. But all projections see global oil demand continuing to increase through at least 2030. And that’s plenty of time to make money.
Until next time,
Luke Burgess
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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