Special Report: Forecasting Oil 2017: Black Gold

Some people think oil is going to drop to $20 a barrel; others think it’s going to hit $150... But who has the real answer?

What can we expect for the latter half of 2016 through 2017? Have we seen the worst of this two-year bear market?

More importantly, are you positioned for the next upswing?

If you're not, I'll show you in a moment how to be prepared for it.

oilrig

All we can do is take a look at the current situation, the catalysts ahead, and come up with an outlook. I want to focus solely on the most important dynamic to oil prices: supply and demand.

Here's the situation right now:

In 2015, global petroleum demand increased by 1.4 million barrels per day, with growth being driven (not surprisingly) by non-OECD countries. The EIA expects a similar increase this year, followed by a 1.5 million barrel per day jump in 2017.

Here at home in the U.S., our consumption of liquid fuels grew by nearly 300,000 barrels per day in 2015.

But demand hasn't been the issue lately, has it?

Keep in mind that the U.S. is currently consuming approximately 20.3 million barrels of petroleum products (gasoline, jet fuel, etc.). Even though U.S. demand has been relatively flat for the last three decades, it still amounts to about 20% of total consumption worldwide.

It's eerily disconcerting how much we can count on the world's addiction to crude oil. No matter how much wishful thinking is done today, that addiction will not go away overnight.

It's simply the crude reality of the world we live in right now.

Supply, Supply, Supply!

As you can probably guess, the issue over the last few years has revolved around the supply side of the equation.

Specifically, I'm referring to North America.

Love it or hate it, Canada and the U.S. have been on quite a tear lately when it comes to boosting oil production. Crude oil production in the U.S. alone increased from 5 million barrels per day in 2008 (after a long, steady decline since peaking in 1970) to approximately 9.7 million barrels per day during April of 2015.

Compared to the rest of the world, the U.S. and Canada have almost singlehandedly accounted for production growth outside of OPEC.

But the real takeaway is that the EIA is expecting supply growth in the U.S. to fall by 600,000 barrels per day in 2016 and 2017.

What would it take to push crude prices down to $20? For starters, we would have to see U.S. E&P companies radically increase their drilling activity.

And although the U.S. oil rig count has been making very slight gains recently — Baker Hughes reported a one-rig increase in the U.S. on July 29th — try to remember that there are still 411 fewer rigs drilling for crude oil in the U.S. compared to a year ago.

There's a catch-22 taking place right now: U.S. drillers need higher oil prices to ramp up drilling activities, but doing so risks flooding an already unstable market with even more supply.

That's why you shouldn't expect oil to surge overnight to $150 per barrel.

The sweet spot now is around $55 per barrel. That's the point when more than half of U.S. production becomes economical to drill.

Barring some unforeseen, catastrophic disruption to global supply, oil's recovery will be slow and steady.

That's the domestic side of the oil outlook, but what about international? Well, we have that for you, too.

The Death of OPEC

Another major international catalyst for oil? OPEC.

OPEC members extract about 33 million barrels of crude every day.

Unfortunately for members, the organization isn't exactly as cohesive as it would like to appear. Within this oil cartel is 14 bickering, power-hungry oil producers with one mantra: take care of yourself, and watch your back.

Did you hear the rumor mills churning? If not, you will soon. I'm referring to OPEC's latest gambit to push crude prices higher.

And its go-to strategy starts with whispers of a production freeze.

It all started when Venezuela's oil minister suggested that another meeting between OPEC and non-OPEC producers would take place soon to discuss a production freeze.

Given the struggling state of Venezuela's oil industry, this is hardly surprising. The country was on the verge of collapse due to the fact that 95% of its export revenue — and 50% of its GDP — comes from crude oil.

Drillers in the U.S. scoffed (output in the United States has fallen by roughly 755,000 barrels per day between April of 2015 and May of 2016).

The Russian's laughed... and so did the Saudis.

If you were ever curious how deep the ties of brotherhood are within OPEC, look no further than Saudi Arabia. While fellow members like Venezuela are desperately seeking any respite from low crude prices, the Saudis have turned the pumps on full.

Last month, the Saudis extracted a record 10.67 million barrels per day. To put a little perspective on that, that's roughly one out of every three barrels produced by OPEC!

oceanrig

It's no secret that the Saudi Kingdom is trying to get out of the crude oil business and ramping up its investments in renewable energy. And just to meet its targets for 2020, the country will need to spend upwards of $20 billion. Desperately pumping oil is really its only option. And it's taking OPEC down as it pumps each barrel, intentionally or not.

Now, back to the U.S...

Fossil Fuels Still Necessary

Remember that U.S. petroleum demand shows that we are consuming in excess of 20 million barrels per day right now. Even with impressive growth in renewable energy, fossil fuels are still expected to account for 78% of global energy use in 2040.

Let's assume that U.S. consumption stays flat, even declines slightly over the next few decades. The EIA's current forecast is that global petroleum demand will rise by 31 million barrels per day, topping more than 121 million barrels per day in 2040.

2040 is still a ways off. Things change. Outlooks and projections get updated constantly to account for new developments. So what about something a little closer down the road?

That might depend on whom you ask...

According to the EIA's International Energy Outlook 2016, global consumption of petroleum and other liquid fuels will rise to 100 million barrels per day in 2020 — an 11% increase from today.

OPEC believes global oil demand will reach 97.4 million barrels per day in 2020, which is actually a 500,000 increase of its previous projections. That's a rather rosy prediction coming from the organization responsible for supplying one-third of the world's oil supply. Then again, we can't hold much faith in any numbers put out by OPEC... We've always felt they're on the shady side of reporting.

The End Result

So what are we expecting for oil prices during the next 16 months?

I believe oil has found its bottom and is slowly moving into its next bull cycle. And even with the apprehension over the motives of OPEC members, it's clear that global demand will inevitably move higher, with growth being driven by non-OECD countries like India and China.

Coupling that with the fact that falling output in North America (U.S. crude production is now under 9 million barrels per day) will help ease an oversupplied market means we're potentially staring at a significant buying opportunity right now.


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