Logistics managers should brace for higher energy costs in 2018

Energy and logistics analysts are telling shippers to expect higher rates in every mode of transport.

Derik Andreoli, Ph.D.c, Director of economic research and forecasting at Mercator International and the oil and fuel columnist at Logistics Management, observes that oil prices have been rising steadily since late June.

“The fundamentals support a bullish outlook,” he says. “Global demand looks to grow between 1.4 and 1.6 million barrels per day. The oil surplus that hung over producers at this time last year has disappeared, despite the fact that U.S. shale oil production grew by more than 900,000 barrels per day over the course of the year.”

Consequently, the direction of the oil market is largely in the hands of Saudi Arabia, and to a lesser extent, Kuwait, as these are the only OPEC producers who have adhered to the agreed to cuts in any meaningful manner.

“Had these two continued in 2016 to produce oil at the average rate they each achieved in 2015, the market would still be oversupplied by around 560,000 barrels per day,” says Andreoli. “While a handful of other OPEC members now produce fewer barrels than they did in 2015, these countries are suffering long-term production declines.” 

According to Andreoli, predicting a price this year is complicated by the return of the swing producer. At what price will Saudi Arabia let the taps flow more freely? Given the current trajectories of global supply and demand, he says it is easy to see oil prices rising above $70 by mid-year, and this upward momentum could continue if the global economy continues to chug along its current path.

That said, it should be noted that Saudi production increased in both the second and third quarters, and this trend appears to be holding through the fourth.

“It appears that the Kingdom is happy to lift production so long as oil prices increase,” says Andreoli. “This does not bode well for consumers as prices might surpass the $70 barrel mark and finish the year on an even higher note.”

Upward pressure on prices might be mitigated if substantial oil volumes suddenly appear from “drilled-but-uncompleted” wells, Andreoli concludes, but he is not making that bet yet.

Andreoli will be sharing his views on energy trends when he joins other industry experts on the “2018 Rate Outlook” webcast this January.