OUTLOOK ’15: Crude downturn expected to continue into new year

By Tony Dillon

LONDON (ICIS)–The downtrend in the crude oil markets, which took prices from around $115/bbl in the middle of 2014 down to around $60.00/bbl in December, is expected to continue into early 2015 on the back of an oversupplied market and ongoing concerns about the global economy.

The powerhouse economies of the US and China are still giving mixed signals, although the US Federal Reserve was sufficiently optimistic to cut back on its programme of economic stimulus at the end of October 2014. The quantitative easing programme had seen the injection of $4,500bn since December 2008.

However, the sharp drop in the price of oil was expected to put a severe strain on the economies of the top US oil states. Financial analysts are already forecasting that Alaska, New Mexico, North Dakota, Oklahoma and Texas will struggle to meet their 2015 budgets.

The OPEC meeting in late November had been expected to announce a cut in production in an effort to support prices, but this was basically vetoed by Saudi Arabia. It has been widely suggested that the largest OPEC member is prepared to let prices tumble in order to protect its market share and put pressure on the economics of US shale production.

The next scheduled OPEC meeting is for June 2015, but several members of the cartel have suggested that they will push for an emergency meeting if prices continue to fall.

Increased US domestic production and the reversal of some pipelines to take crude to the US Gulf refining region has seen a drop in US imports, with the most dramatic on Nigerian crude. Once the staple diet of refiners on the US east and Gulf coasts, imports of Nigerian grades have dwindled to no more than a trickle in the fourth quarter of 2014 and there is little sign of this changing.

Despite the ongoing turmoil in the country, Libyan production was back above 800,000 bbl/day in early December. However, the National Oil Corporation has failed hit its target of 1m bbl/day with the large Es Sharara field still shut down following damage to a pipeline.

With two rival groups having set up their own governments – both claiming to be in control of marketing the country’s oil – it seems almost inevitable that there will be further clashes and strikes, which will prevent production getting back to anywhere close to the 1.6m bbl/day achieved during the Gaddafi era.

Following an agreement between Kurdistan and the Iraqi government in Baghdad over the marketing rights to Kirkuk crude from the Turkish export terminal of Ceyhan, oil is now flowing steadily for the first time since March 2014, when the pipeline was closed due to sabotage, and exports are expected to continue to build.

Although some progress seems to have been made in the talks over the disputed Iranian nuclear programme, these will now continue through to mid-2015. If an agreement is finally reached and sanctions against the Islamic Republic are lifted, it is expected that it could hike production from around 2.75m bbl/day to around 4.0m bbl/day.

Sanctions against Russia because of the ongoing situation in Ukraine have not had any effect on oil exports and this situation is unlikely to change.

The OPEC Monthly Oil Market Report for December showed that OPEC production in November had fallen by 390,000 bbl/day to 30.05m bbl/day.

The Monthly Oil Market Report from the International Energy Agency (IEA) was slightly higher than this, showing estimated OPEC production in November at 30.32m bbl/day, a decrease of 315,000 bbl/day over the previous month, but up from 29.73m bbl/day in November 2013.

The IEA report forecast the call on OPEC crude in 2015 at 28.9m bbl/day, down 300,000 bbl/day from the previous report. It also forecast global oil demand growth for 2015 at 900,000 bbl/day, down 230,000 bbl/day, taking consumption up to an average of 93.3m bbl/day, an increase from 92.4m in 2014.

OPEC showed a slightly different estimate for 2015 global demand at 92.26m bbl/day, but with the call on OPEC production also at 28.9m bbl/day.

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