Cheaper oil but not cheap

DNB Bank’s annual market update makes the following key statements:

• DNB expects an oil price of US$ 102/bbl for 2014 and US$ 100/bbl for 2015, and then a gradual decrease in prices to US$ 90/bbl during 2015 – 2020. Oil price will trade mainly in an US$ 80 – 100/bbl range after 2015.
• A larger supply growth outside of OPEC than that seen in the last ten years, in combination with lower trend line oil demand growth, will bring oil prices lower. However, DNB do not believe that there will be a return to cheap oil, due to the high costs of bringing new barrels to market, rising geopolitical risk and rising global field decline rates, which will materialize if the oil price falls too much.
• Oil’s share of the global energy mix will continue to decrease in coming years.
• The high and rising oil price that has been seen since the change of the millennium is starting to initiate structural changes to oil demand through substitution and efficiency improvements.
• The US market will retake its position as the most important market for oil price formation in the coming 5 – 6 years. Net US imports of oil have dropped since 2007, but so far the largest switch has been in refined products. The next step is significantly lower crude oil imports. US demand for refined oil products will be trending lower in coming years.
• Accelerating oil demand in the non-OECD is not materialising, as DNB Bank had predicted it would. Chinese refinery throughput is stalling and Chinese economic growth will be less energy intensive going forward. High car sales will not be enough to secure the same level of oil demand growth from China as we have been used to see during the last ten years. Population growth and urbanisation will continue to provide energy demand growth in non-OECD but refined products are not going to be the winner in the energy mix market share.
• Oil production outside of core OPEC is growing quicker than global oil demand due to the North American shale revolution. According to DNB Bank, this implies that the ‘call on OPEC’ crude oil will be falling in coming years. US crude oil production has increased 1.7 million bpd in the last two years. Growth will be lower in the coming years but still very high. The resource base looks to be larger than most people anticipated a year ago. EIA now says that recoverable global shale oil resources are 345 billion bbls.
• Unplanned outages cause by geopolitical unrest have more than offset the growth in US shale production since 2010, preventing a return to cheap oil.
• Saudi Arabia is soon to need a higher oil price than US$ 100/bbl in order to balance the state budget.

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