2015 Crude ForeastOverview | Russell T. Rudy Energy LLC
John Higgins, the publisher of “World Oil” magazine was the speaker at the February meeting of the Houston Chapter of the American Petroleum Institute (API). Predictably, his comments were quite interesting and provocative. While they are not at great variance with what many other analysts have forecast, his are backed up by a wealth of experience and data. In a previous post I presented an overview of his remarks. In this post I deal specifically with “World Oil’s” crude oil forecast. Hopefully future posts will cover their natural gas forecast, and in as much as it impacts domestic onshore prospects, the international forecast as well.
Background
At mid-year 2014 the oil industry was enjoying a 4 year period of peak activity. Prices were high, rigs running and oil flowing at record levels. However, in retrospect, a storm was looming in that world supply was outstripping demand by 1.8 million barrels per day (bopd). Thanks to increased production from Iraq and Russia a glut was building. However, the real force was U. S. shale production. As a result of major successes in the Bakken, Eagle Ford and Permian plays, domestic production was at 9.2 million bopd and all indications were that rates would continue to climb. Consequently, world supply was at 94.2 million bopd, an increase of 2.1 million bopd over 2013.
Concurrently, demand had increased as well, but only to 92.4 million bopd. The resulting glut of 1.8 million bopd was a price disaster in the making.
In October, apparently sensing an impending price crisis, Saudi Arabia offered discounts to Asian customers. This started a price slide which was intensified when OPEC voted to maintain its current level of production at 30 million bopd, thereby insuring continued oversupply and lower prices. It soon became clear that Saudi Arabia valued market share over price stability, and would no longer act as the swing producer to maintain prices.
Currently
According to “ World Oil’s“ Forecast and Data 2015 Executive Summary, “If Saudi Arabia gets its way, the world will return to the past, when the Middle East was the primary region for oil and gas production and the U. S. imported 50% or more of its crude oil requirements.” If prices are to recover, world-wide production will have to slow in order to work off the excess oil inventory and get in line with global demand.
Unfortunately, some national oil companies have no alternatives. For example, Mexico’s state oil company, Pemex, is under intense pressure to maintain maximum output in order to provide jobs. Russia, Venezuela and Iraq are so heavily dependent on oil revenues that they have no choice but to continue to produce, no matter the price.
Basically, that leaves it up to the U. S. in general, and shale operators in particular, to cut back on production. Many shale projects have high economic break-even points, and will be shut down. We have already seen capital budgets slashed and rig counts plummet.
The Future
Expect U. S. imports to rise. In 2006 we were importing 14.7 million bopd, but largely by virtue of the shale revolution, this had dropped to 8.9 million bopd in October 2014. As shale operations are curtailed imports will rise again.
Prices will recover as global output falls and demand rises. However, China and the U. S. are the major drivers of demand, and economic growth has slowed in both nations. Most observers, including the International Energy Agency (IEA) expect the gap between supply and demand to start narrowing by the second quarter of 2015, but not disappear. Consequently, expect prices to firm and slightly improve.
Recent history offers little guidance and none of it is encouraging. It took 17 years for prices to recover from precipitous drops in the 1980’s. The price crash of 2008 was rectified by 2011, but this is slight encouragement given our present situation. Either way, we will not see $100 oil any time soon.
To learn more please go to www.worldoil.com .
