Why This Analyst Thinks Oil Will Hit US$80 in 2017

The price of oil is currently hovering around US$48 per barrel and has done so for the past month.

But, oil analyst J. Marshall Adkins from Raymond James & Associates thinks that the price of oil will average US$80 per barrel by the end of 2017. What forms the basis for his bullishness? Simply put, he sees greater than expected supply disruptions on many fronts for oil over the next year.

Three areas for oil supply disruption

Adkins and his colleagues had estimated back in January that there would be 96.83 million barrels per day (bpd) of oil supply in 2017. But, they have recently cut their supply estimates.

First, while Adkins and his colleagues have ramped up their production estimates for some countries (such as Russia, Iran, Kuwait and more) by 320,000 bpd, this increase is partially offset by a reduction of 300,000 bpd in places such as Venezuela and Libya due to internal unrest.

Second, Raymond James expects structural declines in the production of oil to occur in countries such as Mexico, Colombia, Angola, and China. For instance, existing Chinese oil fields are old and they can’t produce as much oil as before. These structural factors have resulted in Raymond James slashing its oil supply estimates for 2017 by a further 400,000 bpd.

Third, US oil production would have difficulties restarting production even as oil prices increase due to a limited pool of labour and equipment. This led Adkins and his colleagues to reduce their estimates for US oil supply by 400,000 bpd.

All told, Raymond James has dialled down its oil supply estimate for 2017 by 780,000 bpd to 96.05 million bpd.

A Fool’s take

The lower supply of oil is what makes Adkins think that oil can hit US$80 per barrel in 2017.

For investors in Singapore’s stock market, the movement in oil prices may be important to note for those who are interested in or invested in companies that are heavily exposed to oil. Some of the bigger companies with big exposure to oil & gas include Keppel Corporation Limited (SGX: BN4), Sembcorp Marine Ltd (SGX: S51), and Ezion (SGX: 5ME).

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat does not own shares in any companies mentioned.