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Page added on March 9, 2015
IEA Sees Fundamental Shifts in the Current Oil Price
- The IEA’s latest medium-term oil forecast is a useful update to the thinking behind its current long-term outlook, which predated much of the current price drop.
- They expect shale output to be relatively resilient and rely on Iraq’s capacity to expand output in spite of significant security risks.
When the International Energy Agency issued its most recent long-term energy forecast last November 12th, Brent crude oil traded just above $80 per barrel. At that point it had fallen only half as far as it would by January 2015, compared to its June 2014 high of $115. As a result, the IEA’s assessment of the price drop in its 2015 World Energy Outlook was incomplete, to say the least. The agency’s Medium-Term Oil Market Report, issued in February, provides a necessary update and some interesting insights about how–and how far–they envision the oil market recovering.
Anyone expecting the IEA to provide a detailed oil-price forecast for the next five years will be disappointed. The current report reproduces recent oil futures price curves and generally endorses the consensus that prices won’t rise as high as the level from which they have just fallen, at least by the end of the decade. At the same time, in the Executive Summary they remind their audience, “The futures market’s record as price forecaster is of course notoriously mixed.” Six months ago West Texas Intermediate Crude for delivery in April 2015 was selling for around $90/bbl; yesterday it closed under $52. So much for the predictive power of futures markets, as most participants are aware.
The report’s analysis of the factors influencing the oil supply and demand balance over the next five years is more useful. First and foremost, it recognizes that the factors contributing to this price correction bear little resemblance to the price drops of 1998 and 2008, and share only a few common threads with the big correction of 1986, chiefly involving OPEC’s behavior. The biggest differences relate to the nature of the North American shale sector, which drove strong non-OPEC supply growth for the last several years, and the economic and policy factors–slowing growth in China, subsidy phaseouts, and currency depreciation– likely to dampen the global demand response to cheaper oil.
With regard to shale, the IEA suggests that the current pressures on the US oil industry will prove temporary. They apparently expect the growth of unconventional production from both shale and oil sands to slow but remain the largest source of non-OPEC supply increases through 2020, outstripping increases in OPEC’s capacity and offsetting declines elsewhere. Those declines include a 500,000 bbl/day drop in Russian production, mainly due to the effect of sanctions over Russia’s involvement in Ukraine.
The agency even suggests that North American shale could emerge from this experience stronger, because of its inherent resiliency. The same factors that should see shale output slow sooner than that from big conventional projects taking years to develop would allow it to ramp up faster, once the current global oil surplus has been consumed. Meanwhile, with larger projects delayed or canceled, conventional production would take longer to return to net growth above normal decline rates.
That could become the factor that dispels the current skepticism concerning shale oil opportunities outside North America, as apparently exemplified in BP’s latest long-term outlook. Companies looking for growth opportunities in a few years might regard developing the shale resources of China, Argentina and Russia–assuming sanctions on the latter end–as lower-cost, lower-risk investments than some deepwater or other big-ticket projects.
As for OPEC, its production growth through 2020 seems to come down to a single country. The report assesses the current situation in Iraq and concludes that despite the threat from the Islamic State and the country’s ongoing internal frictions, output should continue to grow by another million bbl/day or so. That strikes me as optimistic, particularly considering the proximity of ISIS forces to Kirkuk, which formerly accounted for around 10% of Iraqi production. Postwar development has focused on the big fields in southern Iraq, which have so far proved to be beyond the reach of ISIS, but a further deterioration of security in the Kurdish north could jeopardize future expansion plans.
The wild card on the supply side is Iran, which under international sanctions has seen its oil exports cut by roughly half. The Medium-Term Oil Market Report explicitly assumes that sanctions will continue. However, if current nuclear talks reached an agreement, sales could ramp up by a million bbl/day over the next year, if buyers could be found. That would alter the IEA’s supply/demand calculations substantially.
And that leads us to demand, which at this point is still a key uncertainty. I concur with the report’s general assessment that the world has changed since previous oil price drops and rebounds in ways that make a sharp rise in oil use less likely. US demand is up, but as I described in a recent post large groups of consumers around the world have seen little or no relief at the gas pump that might stimulate more consumption.
When I wrote about the IEA’s World Energy Outlook last December, I focused on its themes of stress and the potential for a false sense of security. In the short time since then the oil and gas industry has experienced a large dose of stress, but I’ve seen few signs of complacency on the part of consumers beyond a recovery in the US sales of SUVs and light trucks. That may change if low oil prices persist for a few years.
9 Comments on "IEA Sees Fundamental Shifts in the Current Oil Price"
rockman on Mon, 9th Mar 2015 9:28 am
“So much for the predictive power of futures markets”. Which is to say the futures market doesn’t not predict the future oil price. Which is to say the IEA forecast of future oil prices based upon the futures market has no foundation.
“The agency even suggests that North American shale could emerge from this experience stronger, because of its inherent resiliency”. Again what shale drilling plays are they anticipating to be “resilient”? The Bakken and EFs where hundreds of rigs have been shut down? Obviously not. They must be aware of some other shale trends that are being drilled up by invisible stealth rigs. LOL. These folks must live in an alternate universe.
“That could become the factor that dispels the current skepticism concerning shale oil opportunities outside North America”. So the skepticism that was there when oil was going for $90+/bbl is removed now that oil is selling for $50+/bbl?
“…but as I described in a recent post large groups of consumers around the world have seen little or no relief at the gas pump that might stimulate more consumption.” According to the EIA diesel consumption in the EU has increased 11.2% from last January thru Sept. Prices in individual countries: Germany a 34% decrease in diesel prices excluding taxes; the Netherlands…a 33% decrease; England a 40.7% price decrease; France a 47% decrease.
So increased consumption and drastically reduced prices doesn’t seem to support his statement regarding “little or no relief.
Plantagenet on Mon, 9th Mar 2015 11:03 am
US shale oil production is quickly falling in response to the oil glut and lower prices. But presumably it could ramp back up if prices go higher again. It might take 5-10 years to ramp back up but it could happen.
Thats what the EIA means by “resilient”
BobInget on Mon, 9th Mar 2015 12:52 pm
This week in Iraq/Syria
Coalition forces in Syria/Iraq are going after
IS refineries and oil distribution points.
Expect IS to strike similar points, pipelines,
pumping stations, even oil wells.
Remember, when IS set alight one oil well in Tikrit, coalition forces fell back.
Oil well fires are extremely difficult to control.
Libya payed millions to specialized Texas fire-fighters on several oil storage blazes.
Now, with IS and Boko Haram formally united,
expect increased pipeline and oil well attacks
in Southern Iraq and Nigeria.
http://english.alarabiya.net/en/views/news/middle-east/2015/03/06/Tikrit-igniting-sectarian-war-in-Iraq.html
http://www.theguardian.com/world/2015/mar/08/coalition-forces-air-strikes-isis-iraq-syria
Iran gaining upper hands in Iraq.
http://www.newsweek.com/iraq-praises-irans-help-fight-against-isis-312316
BobInget on Mon, 9th Mar 2015 12:57 pm
President O Declares Venezuela Major Threat
By Jeff Mason and Roberta Rampton
WASHINGTON, March 9 (Reuters) – U.S. President Barack Obama issued an executive order on Monday declaring Venezuela a national security threat, sanctioning seven individuals and expressing concern about the Venezuelan government’s treatment of political opponents.
“Venezuelan officials past and present who violate the human rights of Venezuelan citizens and engage in acts of public corruption will not be welcome here, and we now have the tools to block their assets and their use of U.S. financial systems,” White House spokesman Josh Earnest said in a statement.
“We are deeply concerned by the Venezuelan government’s efforts to escalate intimidation of its political opponents. Venezuela’s problems cannot be solved by criminalizing dissent,” he added.
The White House said the executive order targeted people whose actions undermined democratic processes or institutions, had committed acts of violence or abuse of human rights, were involved in prohibiting or penalizing freedom of expression, or were government officials involved in public corruption.
The seven individuals named in the order would have their property and interests in the United States blocked or frozen and they would be denied entry into the United States. U.S. citizens would also be prohibited from doing business with them.
The White House called on Venezuela to release all political prisoners, including “dozens of students,” and warned against blaming Washington for its problems.
“We’ve seen many times that the Venezuelan government tries to distract from its own actions by blaming the United States or other members of the international community for events inside Venezuela,” Earnest said in the statement.
“These efforts reflect a lack of seriousness on the part of the Venezuelan government to deal with the grave situation it faces.” (Reporting by Jeff Mason and Roberta Rampton; editing by Susan Heavey and G Crosse)
BobInget on Mon, 9th Mar 2015 1:33 pm
Washington just woke up. The US… LOST
Venezuela as a reliable (oil) exporter. I hate to say it but, I told ya so early last year. (when we saw Chinese debt piling higher)
President O, to defer damage is basically saying, “We can’t do business with South American Tyrants any longer”
(Saudi Arabia, the world’s biggest arms buyer,
champion public be-header, terrorist financier, is not in South America)
Venezuela’s oil, for decades to come, goes to
China, no matter what loud mouth runs the country.
Losing Venezuela’s oil was completely unnecessary. The US could have jumped in when Chavez died with financial aid of our own. Instead, China beat us to it.
This is clearly another political victory for the Right in America who will lay blame for ‘losing
Venezuela’ on Democrats. (no right wing pol would have permitted aid to Venezuela. But since the question never came up), we worry about Bengazi instead. Now that Libya is no longer producing oil we can worry about
Clinton’s emails.
Even if Middle-East peace breaks out, even if it rains in Central Africa, Even if Boko Haram, IS goes down, Israel agrees to share natural gas with Palestinians, Venezuela ships to China and that’s that for this stupid glut fiction.
Saudi Arabia is pumping flat-out, some day soon as water-cuts become unmanageable
the Saudis will be forced to cut back.
If Canada ships its crude oil East and West instead of South we may as well close up shop.
Plantagenet on Mon, 9th Mar 2015 2:45 pm
Its silly to blame Obama’s problems with Venezuela on “the right.” Obama is on the left, and the problems between obama and Venezuela reflect Obama’s own decisions and policies.
Mark Ziegler on Mon, 9th Mar 2015 3:46 pm
Venezuela tar sands.http://www.ctvnews.ca/sci-tech/b-c-tailings-pond-breach-what-you-need-to-know-1.1949760
viewcrafters
shortonoil on Mon, 9th Mar 2015 4:29 pm
The largest producer in the Bakken is now on the auction block. That is Whiting Petroleum. With a market value of 1,043 times forward earnings there is likely to be a stamped to invest. Everyone wants to wait one thousand years to get their money back? The shale industry has piled up over $1 trillion in debt to bring on line 3.25 mb/d boe. Taking on $308,000 in debt to get production of one barrel a day for maybe ten years looks like such a bargain! The IEA’s definition of resiliency must have been concocted at the local insane asylum. One would truly have to be crazy to believe that there could be anything but bankruptcy in store for the shale industry.
The end of shale is likely to be violent. Pension funds, which by law can only invest in AAA rated investments, are going to be asked a lot of embarrassing questions. Its collapse will bring into focus the collusion of the EIA, the IEA, and the financial industry. The crash of a $1 trillion Ponzi scheme is likely to drive a lot of coach roaches out of the woodwork!
http://www.thehillsgroup.org/
Northwest Resident on Mon, 9th Mar 2015 4:57 pm
“the collusion of the EIA, the IEA, and the financial industry”
In cooperation with big business, Federal Government, international governments and mass media channels.
The SCAM of the century! The Mother of all Scams!
We kept some people employed. We churned out a bunch of new millionaires and probably one or two billionaires. We squished a few animals. We burned a few towns. We polluted a few rivers. We kept the wheels of BAU creaking and groaning along for a little while longer. We put off the day of reckoning to some point in the not too distant future — but that was a while back, and now that “some point in the not too distant future” is very close to today.
We gave a few people more time to prepare, time which if used wisely could end up being the difference between life and death. If not, well, at least we got a few more years of happy motoring, fast food delights and fossil fueled creature comforts.