What Higher Oil Prices Mean for Investors in 2018

Brent crude prices continue to hold near its three-year high to close slightly above US$70/barrel yesterday. Let us look at why oil prices are rising and what this means for investors in 2018.

The International Energy Agency’s (IEA) monthly oil report in mid-Jan 2018 was generally bullish. IEA estimates that global oil demand in 2018 is estimated to be 99.1 mb/d (million barrels per day). Oil demand grew by 1.6mb/d in 2017 but is expected to slowdown by 1.3mb/d in 2018 due to higher oil prices, changing patterns of oil use in China, weakness in Organisation for Economic Co-operation and Development (OECD) demand and the switch to natural gas in many non-OECD countries.

On the supply side, global crude oil markets saw an exceptionally tight 2017 fourth quarter as the large draw in OECD crude stocks coincided with a decline in Chinese implied crude balances. The combined draw is estimated at 1 mb/d. Of particular interest was the fact that oil production in the US continues to rise impressively; US crude supply is expected to exceed 10mb/d and surpass Saudi Arabia as the world’s second largest producer of crude oil in 2018. Venezuela accounted for the largest unplanned output fall in 2017 and production declines continue to accelerate.

Overall, a December 2017 Reuters survey of 32 economists and analysts forecast Brent crude to average $59.88/barrel in 2018. Some banks have raised their Brent 2018 price forecasts by between $5/barrel and $8/barrel, citing supply tightness and strengthening growth in demand.

It goes without saying investing in oil and commodities is not for the faint of heart. For investors prepared to accept the volatility, they can look into exchange-traded funds (ETFs) and/or stocks of upstream petroleum companies.

The oil and gas industry is generally divided into three segments. Upstream companies explore and produce oil. Midstream companies process, store and transport petroleum commodities. Downstream corporations include refineries, distributors and retailers that sell finished petroleum goods to the end-consumers. Do bear in mind there are relatively few companies listed in Singapore that have a substantial upstream presence. Gaining exposure to oil directly would almost certainly mean Singapore-based investors would have to purchase ETFs or equities denominated in US dollars.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.

Editor's note: The article has been updated after the initial publication.