What will determine oil prices in 2018

U.S. production, geopolitical risk and OPEC members’ commitment to a quota will be the key factors determining the price of oil in 2018, says Brian See, vice-president of equities at CIBC Asset Management.

He sees oil remaining in the US$55-US$60 range next year, but will monitor how those factors impact his forecast.

Whether or not members of OPEC and Russia comply with production cuts agreed to earlier this month is a major consideration. The countries said they would extend through 2018 the 1.8-million-barrel-per-day cut that has contributed to rising oil prices in 2017.

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“Historically, OPEC members have cheated and brought on production despite production quotas in place,” says See, who manages the CIBC Energy Fund.

The alliance led by Saudi Arabia and Russia also said it would revisit the decision if price increases led U.S. shale operators to start production again. As a result, the second thing See will monitor is how much U.S. companies are spending and how much production expands.

“We estimate [U.S. producers] can grow anywhere from 0.6 million barrels to 1 million barrels [per day] next year,” he says.

Read: Lessons from the OPEC conference

The third factor that could impact price is geopolitical risk from conflict in Iraq and Kurdistan, from the U.S.-Iran nuclear deal, and from violence in Nigeria and Libya, See says. “There is a lot of geopolitical risk around the world, and all these regions produce a significant amount of oil,” he says. “Events could potentially take production offline at a very rapid pace.”

Pipeline capacity

In 2018, Canadian producers will once again be dealing with a lack of pipeline capacity to get oil to market as oil sands production grows, See says. This means a weakening price for heavy oil as well as producers returning to rail as an option to ship their product to the U.S. Midwest or Gulf Coast.

Takeaway capacity is going to be a constraint in 2018, so investors will want to find companies with arrangements to move their products, See says.

“Canadian investors could either look at the rail companies or at Canadian heavy producers with either pipeline capacity commitment—so they have an ability to ship their crude by pipeline—or have other forms to consume that heavy oil domestically within the province,” he says.

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This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.