Barclays forecasts oil prices to fall in 2018 and 2019

It’s been a buoyant couple of weeks in global oil markets, with the prices of Brent Crude and West Texas Intermediate both hitting levels not seen since 2014.

The current bullishness in oil markets has been underpinned by a number of factors, including increased demand for petroleum from rising economic growth, a reduction in crude inventories and a jump in geopolitical risk in the Middle East. These factors are expected to keep oil prices elevated in the near term as we head into the Northern Hemisphere summer.

Second half weakness

For the second half of 2018 however, investment bank Barclays has projected the oil price to fall for a number of reasons. Barclays believes the market has already priced in reduced output from Venezuela and the impact of renewed sanctions on Iran have been exaggerated. Furthermore, the supply constraints in the first half of 2018 were partially due to one-off weather events and the growth in shale production in the United States is predicted to continue.

Oil production in the United States has surged above 10 million barrels a day for the first time in four decades as new drilling and production techniques have opened up billions of barrels of oil previously thought of as unrecoverable. This significant market development has reversed decades of declining output and turned the United States into an exporter with the International Energy Agency predicting its oil output will surpass Saudi Arabia and Russia in 2018. 

Stock market impact

Barclays expects the oil market to move back into surplus towards the tail end of 2018 and remain oversupplied in 2019. It forecasts the price of Brent will average $63 per barrel this year, and $60 per barrel in 2019, approximately 12% and 16% lower than its current price.

If Barclays’ forecast proves accurate, it would have negative consequences for Australian oil producers such as Beach Energy (ASX:BPT), Oil Search Limited (ASX:OSH), Santos Ltd (ASX:STO) and Woodside Petroleum Limited (ASX:WPL) who have all enjoyed strong gains over the last several weeks.

In contrast, a falling oil price would be welcomed by airline stocks such as Air New Zealand Limited (ASX: AIZ) and Qantas Airways Limited (ASX: QAN) given the significance of oil prices on airline profitability.

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