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Is the oil price heading to US$100 a barrel?

It isn’t only the miners that are basking in the glory of stubbornly high metal prices that are driving the sector’s outperformance. Our listed energy stocks are also on a tear as the overnight surge in the crude price to a three-year high is prompting some to ask if oil is heading towards US$100 a barrel.

Such an outcome will provide a huge upswing in valuation (and share prices) of the likes of Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH), Santos Ltd (ASX: STO) and Origin Energy Ltd (ASX: ORG).

It will also be a boon for BHP Billiton Limited (ASX: BHP) as it will likely get a higher price for its unconventional oil and gas assets that it is shopping around.

Bloomberg reports that the price of Brent crude, the benchmark for more than half of the world’s oil, jumped 1.2% to US$70.05 a barrel – the highest since December 2014.

The strength of the oil market would have caught many analysts by surprise as the consensus forecast for oil is probably somewhere in the US$50s per barrel for 2018.

It was the bigger than expected declines in US oil inventories, which is the longest stretch of falling inventories during winter in a decade, that is supporting the oil price.

The Organisation of Petroleum Exporting Countries’ (OPEC) attempt to curb global oil production among member states and its allies are also helping, while supply of crude is further threatened by geopolitical instability in Iran and Venezuela.

However, those tempted to bet on oil recovering back to US$100/barrel may need to temper their optimism.

While chartists may point to bullish indications that the oil price has further room to climb, it isn’t likely to stay there as experts agree that US$70/barrel and above is unsustainable as that is comfortably above the cost of production for shale oil producers.

Shale oil producers are expected to pump 10 million barrels a day from next month, according to forecasts by the US Energy Information Administration. That is equivalent to what Saudi Arabia and Russia produces.

Commodity prices have a tendency to overshoot on the upside and downside, so while crude prices may continue to run ahead in the short-term, it is unlikely to stay there.

What’s more, gas prices could also pull back when winter ends in the Northern Hemisphere. This may coincide with correcting crude prices, and that will fan bearish sentiment towards the sector.

Waiting for a month or two before buying into the sector may not be a bad idea and any pullback will be a good buying opportunity.

While I am expecting crude to retrace some of its gains, I think there is a risk that the average price this year will be ahead of consensus forecasts. This means lots of room for our oil stocks to re-rate, particularly Oil Search, even if oil doesn’t stay above US$70 a barrel for long.

There is another sector that is tipped to do well in 2018 and it doesn’t have to rely on commodity prices. The experts at the Motley Fool are particularly bullish about its outlook and have prepared a free report on the stocks to watch for in the year ahead.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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