Outlook on Oil Prices as the U.S. Is Set to Become the World’s Largest Oil Producer

Where Are Oil Markets Heading?

For much of 2016 and 2017, oil prices traded in a tight range with a ceiling near $54 per barrel. But that changed late last year, with oil prices breaking out to the upside and in January 2018, oil prices broke above $66 per barrel. Where are oil prices heading? According to the International Energy Agency (IEA), the U.S. will become the world’s largest oil producer in 2019.¹ Will U.S. oil flood the market and damped prices or will demand remain strong with prices rallying higher? The U.S. is set to overtake Saudi Arabia and is poised to pass Russia as the world’s biggest oil producer in 2019, maybe even this year. The oil crash in 2014 forced U.S. oil companies to cut costs and become more efficient. Now that oil prices have rebounded, U.S. oil producers are drilling more wells and production is rising. It is expected that U.S. oil producers will pump an extra one million barrels of oil per day this year compared to their 2017 average of 9.3 million barrels per day.² America’s booming shale production is keeping the market well supplied right now. But soaring demand and a lack of major conventional projects is expected to lead to a spike in oil prices. The question is, will it be a short- or medium-term hike? Some analysts think a supply gap could send U.S. oil prices above $70 per barrel with strong demand coming from China and India. The last time crude was at $70 per barrel was back in November 2015. Gary Ross, an oil bull and the global head of oil analytics and chief energy economist at S&P Global Platts said, “Pressure is going to build on crude prices. We’re not feeling it now, but we will.” Not everyone is quite as bullish on crude as Ross. Ed Morse, global head of commodities research at Citigroup has predicted that “2018 could turn out to look a lot like 2014—a year that started with very high prices and ended at very low prices.”³ As a result, Citigroup believes oil prices will top out in the high $50s this summer. For his part, Gary Ross maintains that OPEC has depleted oil stockpiles and, in sharp contrast to the IEA, he doesn’t expect U.S. oil production to increase all that much in 2018 compared to 2017. As a result, some countries looking to buy crude will have to pay higher prices this year to get their hands on it. “The world is going to be short come peak season,” he said. “When the music stops, someone’s not going to have a seat.”

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1. “OMR: History repeating itself?” International Energy Agency, February 13, 2018; https://www.iea.org/newsroom/news/2018/february/omr-history-repeating-itself.html.
2. “What Could Send Oil Above $70 a Barrel: Climbing China, India Demand,” Wall Street Journal, March 7, 2018; https://blogs.wsj.com/moneybeat/2018/03/07/what-could-send-oil-above-70-a-barrel-climbing-china-india-demand/.
3. “Deja Vu: Oil Investors Could Relive 2014’s Swings,” Wall Street Journal, February 2, 2018; https://blogs.wsj.com/moneybeat/2018/02/02/deja-vu-oil-investors-could-relive-2014s-swings/.

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