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Musings From The Oil Patch – Jan. 9, 2018

Any good industry newsletter is obligated to present an outlook for the upcoming year, even if you are unsure. We offer commentary on the key trends we believe will shape the trajectory for oil prices in 2018 and beyond. Bottom line, we see higher oil prices (mid-$50s to $70 a barrel) this year with an improved psychology within and about the industry shaping activity and share prices. In our view, the bias is for oil prices to go higher, rather than lower, than people’s expectations. Prices might not go as high as the true bulls anticipate, but, they could stay elevated (the high end of our range) longer than expected due to the damage done to the long-term oil supply outlook by the cutbacks in capital spending and drilling over the last three years. Higher prices and increased government intervention in energy markets will impact demand trends, which is the other side of the equation for determining future oil prices. For example, France just banned oil exploration in its country and throughout its worldwide territories. The action will have minimal impact on the county’s supply and demand, but it cements France’s leadership in the environmental parade against fossil fuels. Another example is NY Gov. Cuomo who wants to push forward on developing extremely expensive offshore wind power. He needs the federal government’s help, but even the most optimistic timetable leaves him short of replacing the 25% of NYC and surrounding counties’ power that results from the Indian Point nuclear plant shutdown scheduled for 2020-2021. Will this position help him in his re-election and presidential ambitions?

Autonomous vehicle development is moving ahead rapidly, but one hurdle yet to be overcome is whether they can operate in snow storms. Until they prove it, their market attraction will be limited to “fair weather” states. Will they be able to demonstrate success? Probably, but the bigger question is: Will the public feel safe in these cars? How well does Bluetooth work connecting your cell phone in your car? Increased capital discipline and a lack of oil discoveries will shape the oil market in 2018. This could leave the industry staring at $70 a barrel oil prices. If prices stay there for long, look for “animal spirits” to begin driving the actions of E&P execs. While the bomb cyclone storm drove the natural gas market crazy, traders aren’t buying a sustained recovery as they see continued production growth and limited demand increases. LNG exports remain the wildcard in this market.

 

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