The outlook for 2018 oil prices is dull. A majority of pundits have now corralled their one-year forecasts into a narrow, “lower-for-longer” price band, with little disagreement.
A humdrum, fifty-dollar-a-barrel price outlook for next year is part of a recipe to stifle investment, mute production growth and burn off inventories. On a positive note, that’s what’s ultimately needed to cook up higher oil prices.
The Yawn Consensus
A few keystrokes on a Bloomberg terminal will get you a list of 24 recent oil price forecasts from institutional experts. On their own, none of them is worth more than a barrel of coffee, or a cup of oil (the latter is cheaper). The important information in the collective forecasts is the lack of variability.
Three years ago, when prices started to collapse, there was a wide divergence in opinion: some spoke of $20 for a barrel, others over $80. Now, there is little dispersion. A loose bell-curve of opinion for 2018 is centered on $US 52/B for the WTI benchmark with about plus-or-minus five dollars on either side (see Figure 1).
(Click to enlarge)
So, the outlook for 2018 is expected to look a lot like the narrow trading band seen in 2017, which means a lack of upside garners a big yawn from investors.
Investors in oil stocks like the ‘buy low, sell high’ cyclicality. Take that dynamic away and there is far less reason for them to play.
Accordingly, the money is leaving the markets. Canada’s S&P/TSX Oil and Gas E&P Index is down 20 percent year-over-year. This isn’t a Canada-only dynamic—the analogous American E&P Index is down by a sympathetic amount.
Annual financings (equity and debt) by Canadian oil and gas companies are still holding in the $15 to $20 billion range (see Figure 2), but this is deceiving. Over the past two years there has been a growing shift toward mergers and acquisitions (M&A). In most years M&A constitutes 10…