Business Monitor International (BMI) has revised down its average WTI forecast to US$ 97.50/bbl from US$ 102.00/bbl previously. The new forecast assumes an average price of US$ 91.00/bbl for the fourth quarter. For 2015, the WTI forecast has been lowered from US$ 99.0/bbl to US$ 94.00/bbl.
The main factor behind the revisions is a more dramatic loosening of US domestic supply and demand dynamics than had been initially anticipated.
BMI holds a bullish outlook on US oil production growth, a position supported by recent official data. The US Energy Information Administration (EIA) had forecasts slowdown in output growth for 2014 – 2015, to 800 000 bpd. However, strong productivity gains in September from the major US oil shale plays – Bakken, Eagle Ford and Permian Basin – alongside increased drilling activity in the US offshore Gulf of Mexico, has driven an upward revision of the agency’s forecast, to 1 million bpd.
In contrast, US consumption growth is set to remain weak. Small demand gains from the country’s moderate economic recovery have been largely offset by energy efficiency drives, lowering consumption in the transport sector. BMI sees US oil demand broadly stagnating over the next two to three years. From an increase of 0.5% in 2014, BMI predicts that consumption will grow by just 0.2% in 2015 and 2016.
A rise in US crude oil and condensate exports will counterbalance some of the weakness in domestic demand. According to EIA, July exports of condensates, Alaska North Slope and crude oil to Canada reached 401 000 bpd. However, the US crude exports ban provides a major cap on further export growth and BMI sees the 2014 and 2015 increase in production comfortably outpacing the rise in exports.
The long term threat to the US oil market remains the ‘crude wall’ scenario whereby light sweet crude production from the Permian and Eagle Ford especially ramps up beyond available refining or storage capacity, forcing crude oil into pipeline storage, thus prompting a plunge in price and production. While this is not BMI’s core scenario for the market as they anticipate some relief from new condensate splitters in Gulf refineries that will enable some exports of very light sweet crude, policy stagnation over crude exports in Washington may prompt such a scenario.
BMI have additionally factored in several other variables that will add to downward pressure:
- Strengthening dollar: BMI are forecasting a multi year bull run for the US dollar. A stringer dollar will drag on oil prices globally, including WTI.
- Weakness in Brent: A sharp sell off in Brent has seen a narrowing of the Brent-WTI spread in recent weeks. In mid-October the spread was at US$ 2.68/bbl. This compares to a 12 month high of US$ 19.01/bbl in January 2014. A spread this narrow will drive an increase in US imports, adding further downward pressure to WTI.
- Falling risk premiums: BMI’s previous2014 average WTI forecast had factored in a continued price premium from the geopolitical risk to supply in Iraq. Fundamentals appear to be the overwhelming drivers in the market and the premium has been largely priced out of both Brent and WTI. In addition, BMI factor in little geopolitical upside. According to BMI’s Middle East Country Risk analysts, IS will be unable to decisively disrupt production in the heavily guarded south of the country, where most Iraqi oil is produced.
BMI has revised its 2014 average Brent forecast from US$ 105.50/bbl to US$ 103.90/bbl. This assumes an average price of US$ 95.00/bbl for the rest of the year, compared to US$ 92.39/bbl in mid-October. An uptick in demand during the winter season will help to drive prices above their current level, though BMI factors in a moderate upside. It is also anticipated that OPEC will announce a production cut of approximately 500 000 bpd at their biannual meeting on 27 November. This will ease some of the glut in global supply and put upward pressure on Brent towards the end of the year.
BMI have also adjusted their 2015 average price forecast for front month Brent to reflect the expectation that prices will move within between US$ 95 and US$ 100/bbl for the majority of the year on the back of moderating demand and growing non-OPEC supply.
BMI holds to a longer term bearish outlook, which sees a gradual fall in Brent to average US$ 96.00/bbl by 2020. However, there is strong downside risk in its forecast. Structural shift is being seen in global oil markets, driven by US tight oil production. The market is entering an unprecedented period of surplus and BMI advises that it may look to further downward revisions to its Brent forecasts within the coming quarters, to reflect this long term trend.
Adapted from a report by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/28102014/suppressed-global-oil-prices-1508/