Saturday, November 15, 2014

Oil prices in three charts ...



The International Energy Agency yesterday published its November report.  Like the U.S. Energy Information Administration's November Short Term Energy Outlook (STEO) published two days before, the IEA's report catches up with the fundamentals fueling the recent, dramatic drop in oil prices and applies them going forward.

And, like the STEO, the IEA similarly sees a hugely changed outlook.

The EIA's November STEO makes one of the most dramatic month-to-month shifts in oil price forecast I recall seeing in my three-plus decades in the industry.  Just the month before, in the October STEO, EIA had predicted 2015 oil prices (Brent) would average $101.

After having the time to look at the shift in fundamentals driving the oil price decline, the November STEO now predicts 2015 Brent will average $83.

The IEA similarly sees a fundamental shift taking place. As reported yesterday in Platt's blog, The Barrel, the subscriber version of the IEA November report (which will be made public in two weeks), concludes this about oil prices:
 ... it is increasingly clear that we have begun a new chapter in the history of the oil markets.
The IEA regularly includes charts with its reports showing the fundamentals affecting the market.  The three charts included with this column are from the November report.  The one that is most striking -- and the one that explains it all to those who follow the industry closely -- is the second shown here, which tracks world oil supply.  Against increasing, but on a relative scale slowing demand, the ramp up in oil supply is remarkable.

Explaining why it believes oil markets have entered a "new chapter," IEA looks forward at both supply and demand.

On supply, IEA concludes, "While falling prices may well trim investment in US light tight oil (LTO), such potential cuts should not be misconstrued as a production drop, and indeed would likely pale in comparison with recent gains in LTO productivity.  Cost reductions and efficiency gains in LTO production have been constant, and price pressures would only provide more impetus for producers to cut costs further.”

In other words, says the Platts' summary, "the US shale boom is not going away;" the drop in prices will simply be taken out of the hides of the highly competitive oil field supply industry.

On the demand side, the IEA concludes, "Economic development no longer spurs oil demand growth as it once did, especially in the absence of wage gains. China, the top source of incremental oil demand in recent years, has entered a less oil-intensive stage of development ...."

With supply increasing and demand moderating, like EIA before it the IEA now sees an extended shift in price.  
“Our supply and demand forecasts indicate that barring any new supply disruption, downward price pressures could build further in the first half of 2015.... While there has been some speculation that the high cost of unconventional oil production might set a new equilibrium for Brent prices in the $80-$90/b range, supply/demand balances suggest that the price rout has yet to run its course.
As I have explained elsewhere, the consequences to Alaska of such a shift in pricing dynamics are huge.

Yesterday I heard an Alaska legislator try to discount that -- and justify continued state spending in the range of current levels -- because oil prices are going to "bounce back."  The EIA, IEA and other highly respected oil analysts increasingly are concluding that is not likely to be the case.  The legislator didn't cite any sources for the optimism.