Crude oil was a roller coaster ride for investors in 2017. After starting the year at $54.57, Brent Crude looked close to breaking the $60 barrel marker before a number of factors got in the way: OPEC members failed to adequately comply with their production cut agreement and U.S. shale oil produced higher quantities than expected, just to name a few. Brent dipped to $44.14 in July, with many analysts predicting that low oil prices—and poor performing oil stocks—were here to stay.
Oil has been on a tear since September, however. Brent Crude opened January 2 at $66.65—its highest price since 2014 and a 22 percent since January 2017. That has already surpassed optimistic expectations. In November, Morgan Stanley released a report projecting higher oil prices through 2020. According to their projection, Brent Crude would average $63 per barrel by Q2 2018. The same report projected West Texas International (WTI) to average $58.
What do those projections look like two months later? Brent Crude spent nearly all of December 2017 above the $63 mark. WTI has also beaten expectations, currently trading at $60.37.
And that might just be the beginning. Yoon Chou Chong, head of Asian equities at Natixis Asset Management, thinks $80 per barrel is possible by the end of 2018.
Chong isn’t the only one bullish on oil.
Jim O’Neill, a former chairman of Goldman Sachs Asset Management, also thinks $80 is a realistic number in 2018.
Several factors will ensure oil prices will keep rising in 2018.
Global Demand for Oil is Growing
For starters, demand is up and showing no signs of slowing down. In the last quarter of 2018, worldwide liquid fuel consumption topped 98.89 million bpd—marking a steady increase since 2012.
Demand projections for next year are even higher. The U.S. Energy Information Administration expects that number to stay consistently over 100 million in 2018. Here’s what O’Neill had to say:
“[Global economic growth has increased] and is now probably growing at a rate of 4 percent or higher. With the exception of India and the United Kingdom, eight of the 10 largest economies are expanding at the same time.”
Faster U.S. economic growth will further bolster demand. A recent survey projected U.S. GDP growth of 2.6 percent in 2018—not as high as some of us hope, but it would still beat the 2.3 percent growth in 2017 and the 2.1 percent average since the recovery began.
Geopolitics Matter
The Persian Gulf is looking increasingly unstable. Saudi Arabia is undergoing a major economic and social transformation—something leading many analysts to doubt its ability to stabilize global oil prices in the future. Events in Saudi Arabia are putting a “risk premium” on the price of oil.
Then, there are the protests in Iran. The country’s oil exports have increased to 2.3 million barrels per day since the nuclear agreement was signed in late 2015. Large-scale demonstrations against the Iranian government, however, threaten to throw all of that out of balance.
Two things could happen. First, the protests could lead to strikes by oil workers, thereby directly threatening Iran’s oil production. Second, the government’s brutal crackdown against protestors could provoke an international backlash, including renewed sanctions. President Trump could push the European Union to limit Iranian oil imports or cancel planned investments in the country’s oil and gas sector.
Either outcome would reduce the amount of oil available on international markets and ensure oil prices will keep rising in 2018.
Oil Stocks to Watch
Exxon Mobil Corporation (XOM) is now trading at $86.82, up 12 percent over the past four months. This stock will become more valuable as oil prices rise. What’s more, Exxon also produced liquified natural gas and petrochemicals. Exxon Mobil is a good stock to buy and hold throughout 2018.
BP plc (BP) is also on a tear. The stock is currently trading at $42.97, up 11 percent from one year ago. It’s a relatively cheap oil stock, making it an attractive play for 2018.
Oil prices will keep rising in 2018. That means oil stocks in general are a good investment.