The energy recovery is well underway. President Trump continues to roll back regulations aimed at boosting oil production and saving the coal industry.
How might this all play out in 2018?
Here are my predictions for some of the significant energy trends I expect this year.
1. The U.S. will break its all-time oil production record
In October and November of 1970, monthly U.S. oil production just breached 10 million barrels per day (BPD) for the first time. In the 47 years since monthly production has never again reached that level.
In fact, just before the shale oil boom, U.S. oil production had dropped below 5 million BPD. But by 2014 oil production had exceeded 9 million BPD, and was on a trajectory to exceed 10 million BPD in 2015. Then the bottom fell out of the oil market. Production declined. But over the past year, production has been on the way back up and is once more threatening that 10 million BPD record.
I think a new record is nearly a sure bet for 2018. I predict a new all-time monthly production record, probably in the first half of the year. I think it’s also likely that annual oil production in 2018 will beat the 1970 record of 9.637 million BPD.
2. Oil prices to reach $70/bbl
I alluded to this prediction last month, but after the recent price run-up, it seems less aggressive than it was then. Still, some pundits are suggesting that oil is now overvalued, and a pullback is inevitable. See here, or here for example.
But a few lonely voices have been forecasting $80/bbl oil by year-end. Indeed, if the crisis in Iran threatens the region’s oil production, $100/bbl isn’t out of the question this year.
I predicted $60/bbl for 2017, and it took until the last week of the year to reach that. There are a lot of headwinds for oil at this point. In particular, many oil producers are hedging at current prices, and there is a large backlog of drilled but uncompleted (DUC) wells. The latter can bring new oil production online quickly as oil prices rise.
Nevertheless, global crude oil inventories are declining, and demand continues to grow. Concerns that electric vehicles (EVs) are going to start taking market share from oil are way too premature. I believe that oil prices will trade in a relatively narrow range this year, but I predict that ultimately the price of West Texas Intermediate (WTI) will reach $70/bbl. For reference, the current price is $61.59/bbl.
3. For the first time since 2014, the average Henry Hub spot price for natural gas will be above $3.00/MMBtu
Cold weather can play havoc with the natural gas markets. In 2014 the U.S. experienced a frigid winter. Natural gas in storage was drawn down to its lowest level in many years. As a result, natural gas producers spent the rest of the year trying to rebuild inventories. As a result of the lower inventory levels, the average annual price of Henry Hub natural gas was $0.67/MMBtu higher in 2014 than in 2013.
The average annual price in 2017 was just under $3/MMBtu. Before the recent cold snap, I was going to predict that supply would likely keep up with demand this year and that prices would trade in a range from $2.50 to $3. But given spiking demand caused by the “cold bomb” that just hit the northeast, natural gas storage levels are going to be lower than average for a bit.
I think inventories will get back to normal later in the year, but prices are likely to be elevated until then. As a result, I predict that for the first time since 2014, natural gas prices will average more than $3/MMBtu for the full year.
4. U.S. gasoline demand will set a new record high
EV sales are at record highs and growing rapidly. The fuel economy of new passenger vehicles has increased by five miles per gallon since 2007. Nevertheless, U.S. gasoline consumption reached an all-time high in 2017.
The primary reason for the increase is that low gasoline prices have spurred an increase in the number of vehicle miles driven. Total vehicle miles driven in 2017 reached an all-time high. Low gasoline prices have also caused SUV sales to surge.
Gasoline prices are likely to rise in 2018, which will tap the brakes on demand growth. It is also possible that an economic slowdown could negatively impact gasoline demand. Nevertheless, I don’t expect prices to rise high enough to prevent a new gasoline consumption record from being set in the summer.
5. Shares of Tesla will close the year lower
Let me preface this prediction by saying I am a believer in the future of EVs. I also believe Tesla will strongly grow sales this year, and the company will reach some important milestones.
But there are huge expectations built into the share price. And they have consistently not been met.
I have seen Tesla report quarterly earnings that fell far short of investor expectations, and the share price nevertheless rose. I have watched Tesla CEO Elon Musk consistently overpromise and underdeliver. Investors don’t seem to care because they have faith that Musk will ultimately deliver.
Last year there was a growing disconnect between Tesla’s share price and Tesla’s financial performance. The share price reflected Musk’s projections and promises, but those lofty projections weren’t met. That disconnect can’t last forever.
Further, Tesla faces an ever-growing list of competitors in its space. The company is burning through billions of dollars in capital every quarter. They will almost certainly be forced to raise more money this year. Each delay allows competitors to close the gap.
But this is a risky call. Cult stocks can trade at irrational values for a long time. Stock prices are a reflection of underlying value and investor psychology. A company can sometimes command a market capitalization disconnected from its financial performance for a long time. But I think 2018 is the year that Tesla investors finally begin to lose some patience. Shares opened the year at $312.00. I predict they close the year lower than this.
Conclusions
There you have my 2017 energy predictions. The themes are higher oil production, modestly higher oil and gas prices, continued growth in gasoline consumption, and an EV company that finally experiences a correction.
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1. Pretty safe prediction and one I agree with. EIA is predicting FEB18 for the monthly record. There is even a chance that it already happened in NOV or DEC of 2017. JAN looks to be down from extreme cold temps in ND (can monitor natgas pipeline volume and implies lower crude as well).
2. A safe and not helpful prediction. Who cares if some time during 250+ trading days, we pass this value. There is inherent variability (noise) in oil price so that even if we close lower or average lower than current $64, odds are likely of short excursions higher. Predicting the average price would be better as this is what affects producers and consumers. Or at least the closing price for the year (as there is not the complex probability game of looking at odds for each day.)
3. This is properly described (average price for the year) to mean something. It’s an aggressive call but not crazy (given the implicit variability of gas price). Need to count on winter bailing you out with colder than normal. Personally, I think trying to guess the weather impact more than 30 days is like betting red/black in Vegas. No science to it. The interesting thing is to look at supply issues (technology, pipelines, regulatory, depletion) and systemic non-weather demand issues (LNG, coal regulations, etc.) My guess is the strip and that is a bit under $3. But not that much. So you could easily get small amount of luck needed on weather to work out for you.
4. I don’t know much about this topic or how to evaluate the prediction.
5. Interesting. It’s aggressive but not crazy. That is a very high volatility stock. I hope it declines (such a limousine liberal crony capitalist play). If I had to make a non EMH bet would be inclined to short Tesla. (The EMH bet is that the stock price is correct and will go up at the cost of capital rate.)
“Pretty safe prediction and one I agree with.”
Safe, but it’s going to be a highly newsworthy event. So this prediction is more in line with entertainment value.
“A safe and not helpful prediction.”
Again, entertainment. I am often asked how high oil prices will rise this year. People want to hear a prediction. More useful predictions are the ones that are challenging to make in January and grade in December. Such as “Is oil relatively overpriced or underpriced right now?” That can change multiple times during the year and can impact investment decisions differently during the year.
“Need to count on winter bailing you out with colder than normal.”
Yes, short-term natural gas predictions are notoriously weather dependent, and hence highly subject to luck.
Robert Rapier:
Great list and insights.
Not sure this belongs on the list, but maybe on some list somewhere, regarding 2018.
“Global carmakers to invest at least $90 billion in electric vehicles
Paul Lienert
5 MIN READ
DETROIT (Reuters)”
—30—
It really seems like the automakers have turned the corner to battery cars.
I have been reading up on solid-state batteries. I am just a wag, but it looks like commercialization is in the cards on solid-state batteries, which are much, much better than lithium batteries.
If solid-state proves out, you get run-of-the-mill battery cars with 400-mile ranges and easily higher. The costs will come down. Battery cars are simple, and should last much longer than ICEs. The internal combustion engine is a wonderful device, but compared to a simple electric motor, the ICE is a nightmare.
I did not think I would see this in my lifetime, but give me another couple decades and…I will see self-driving battery cars on the road. Lots of them.
As I always say, the technology is there to create and cleaner and more-prosperous world. Whether man can get there or not…..
My understanding is that solid state batteries are based on lithium chemistry. This allows a fast charge without overheating and also restricts the lithium dendrite growth. Lithium will be hard to replace as it is the lightest metal with the highest potential.
I guess the question will be that how to increase battery life. Battery replacement costs are not cheap. Metals recycling from the batteries will be needed. This will probably drive up metal costs.