Volatility is all but certain to be the word of the year for the oil industry in 2017, as the uncertainty along all axes—politics, economic growth, supply disruptions, OPEC and non-OPEC quota compliance, and U.S. shale oil production—is probably as great as it has been since 1979 (Iranian Revolution, terrorism in Saudi Arabia, looming war between Iran and Iraq). Yet the price is high and predicted by many to go higher next year. (To many pundits, the optimism about next year’s oil price—and the U.S. stock market—should be taken as a bearish sign.)

Politics: Terrorism remains the headline this week but it’s not clear that it will be any worse than now, that is, the occasional attack on civilian targets in the West and a greater number against a variety of targets in Iraq, Turkey, and Afghanistan. Terrorism in the latter three, sad as they are, have minimal impact on the world economy or the oil market, but the former conceivably could create uncertainty and reduce consumer spending, slowing economic growth. Bearish

Russia emerges from the politic wilderness, sanctions end, improving the country’s economy and perhaps strengthening the ruble, which would be bearish for oil (stronger ruble lowers profits on oil sales in dollars). At the same time, Putin should have no trouble maintaining compliance with the agreed upon production cuts. Mildly bullish.

The Trump factor: While there might not be a trade war or recession due to economic policy uncertainty, as Trump’s intentions appear relatively unrelated to his statements or campaign promises, there is potential that his Administration will trigger or at least enable a recession. The unleashing of ‘animal spirits’ of businesspeople is thought likely to produce an economic/investment boom, combined of course with tax reform/reduction for corporations. Bearish early, bullish later.

Economic growth: Aside from possible Trump moves, economic growth in China, Latin America and Europe remain uncertain. Reforms in Argentina and Mexico are hopeful signs, but China remains an opaque mountain of debt, Europe has numerous trouble spots but shows hints of recovery, the strong dollar assisting their trade balance. Bearish, but with bullish hopes.

Supply disruptions: The level of ‘lost’ supply has dropped recently, especially with the lifting of sanctions against Iran, but Libya, Nigeria and Venezuela all remain very serious question marks. The former two keep threatening to restore shut-in supply, but their oil bark has been worse than their oil bite—to date. Libya could apparently restore a significant amount of supply quickly with resolution of local disputes (and has restored two fields to production in recent days), but Nigeria has a tougher political hill to climb. Bearish.

Venezuela only needs Mel Gibson in a supercharged Ford Falcon with a sawed-off shotgun to become wholly apocalyptic. (Alternatively, President Maduro reminds one of the liberator in Woody Allen’s “Bananas,” whose decrees include ordering the citizens to wear their underwear on the outside, so hygiene can be monitored.) The possibility of either widespread political unrest and/or an oil workers’ strike is growing and could mean at least a modest spike in oil prices, although it is unlikely to be a lasting increase. Bullish.

Initial signs are that OPEC/non-OPEC compliance with promised production cuts is robust, conceivably as much as 2/3s or about 1.2 mb/d. If Brent hits $60 or more, producers should be watched carefully for signs of backsliding, but initial compliance should reduce global inventories slightly. Bullish early, bearish later.

Shale: The supply/demand balance will crucially depend on investment in the U.S. Southwest, mainly the Permian Basin, with the STACK and SCOOP basins not quite ready to soar. However, if the result is that total U.S. production rises sharply, then markets will fear a new glut plus a potential shift by the Saudi government back towards defending market share. Bearish.

A suggested timeline:

First quarter, cold weather and the Trump boom will keep prices up, with WTI between $50 and 60/barrel. If Venezuela ceases production for more than a week or two, add $5-10/barrel, but only while production is shut down.

Going into the 2nd quarter, fears about the global economy rise, with U.S. stock markets in retreat and Trump trying to change U.S. trade policies. At this point, rising U.S. shale production should be growing fast enough to worry traders and foreign oil producers; if Libyan oil remains on an upward trajectory, the perception of a delayed market re-equilabration will grow. Prices dropping below $50 as quarter proceeds.

Third quarter, the combination of OPEC/non-OPEC compliance to production cuts and global economic growth will determine whether prices threaten the $40 level or remain close to $50. Poor compliance, especially from Iraq and Russia, and rapid growth in U.S. shale could move Saudi policy into reverse.

Fourth quarter, “hard to see is the future,” Yoda.

As always, recall my piece explaining how the short-term price is highly uncertain compared to the long-term price, but there seems little chance that volatility will decline.

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