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Tuesday, 10 March 15
OIL PRICE FORECASTING - IGNORE THE EXPERTS: COLIN MARSHALL
 KNOWLEDGE TO ELEVATE
Experts put themselves on a pedestal, making claims to have special forecasting abilities for oil price trends. They, too, one way or another, charge for making those claims. Because of this, they deserve to be investigated. And, depending on the outcome of the investigation, they may also be deserving of ridicule.So, what is driving the oil price today? Many commentators have noted that today, there are a number of hypotheses, phenomena and factors all contributing to the vagaries of the oil price:
Rising shale hydrocarbon supply. Shale oil and gas ramping up, as producers have recognized that shale production is more prolific than expected. Furthermore, the certainty of shale hydrocarbon production has proved attractive (compared with normal exploration), following more of a “production line” model, where every dollar injected delivers a reasonably certain production.
Worldwide oil demand is dropping and not just in China. Efficiencies are resulting in reduced demand. Winters are generally milder. Slowly but surely, global users are switching to gas and dropping the price as technology improves and economies of scale kick in.
Cars create about 60 percent of the demand for oil, and the introduction of gas-powered and electric vehicles is increasing. Solar power is also increasing and could become a material alternative energy source in the medium term.
The Middle East is unstable. The potential for severe supply disruption from war, political (“Arab Spring”) uprisings or even sanctions adds tension and uncertainty into the already precarious supply and demand balancing acts. Erratic production from war-torn countries like Iraq and Libya often surprise the market with actual supply far different from predictions.
The Islamic State (IS) scares analysts as well. The market is easily spooked by terrorism, notably IS, who frightens even al-Qaeda. This threat of terrorist activities tends to keep prices high or at least volatile.
Prices need to support budgets. Many countries rely heavily on oil and gas revenues to support their national budgets.
In other words, once prices drop, their pain may force them to cut production themselves if they are Organization of Petroleum Exporting Countries (OPEC) members, or at least put significant pressure on swing producers to reduce production to increase prices.
Saudi believes in supply and demand. Saudi Arabia, and hence OPEC, has maintained a firm stance not to cut production to maintain prices, as they believe that any reduction would probably not increase oil prices, as the shale producers would simply fill the gap.
By allowing oil prices to fall, Saudi hopes the shale producers will reduce production, and not make material shale-related infrastructure capital commitments.
Supply will drop, prices rise, allowing OPEC to maintain their market share, at higher prices, in the future.
Saudi doesn’t believe in supply and demand — it’s all geo-politics. Saudi wants to see the end of the current Syrian regime, as does Qatar, as Syria blocks their access to European gas.
Despite this anti-Syria alignment, Qatar allegedly supports IS as a catalyst to topple Syria whereas Saudi chooses to allow oil prices to free-fall, to put pressure on Russia to stop supporting Syria, a position the US allegedly supports.
Putin is unlikely to capitulate as giving central Europe an alternative gas supply to mother Russia may bring even more pain than low oil prices.
Reduced costs will mitigate the lower prices. Some ambivalence toward low prices, especially by the majors, comes from the fact that costs are expected to eventually drop as inefficiencies (“fat”) are taken out of various components of the energy value chain.
In other words, providing one has the resources to endure the period until costs “catch-up” and reduce sufficiently, producers should eventually see a return to the profits they were previously receiving, even in a low oil-price environment.
Work programs are committed. Some companies have work commitments that cannot be immediately adjusted as a result of oil price changes.
Hedges give some short-term protection. Some companies will have taken out oil price hedges and this will have protected them from low oil prices, disincentivizing them to reduce production — but these hedges will drop off soon.
Two primary observations develop from this long list: first, there are a lot of points, perhaps suggesting that we really cannot expect to make a sensible prediction.
Second, there are arguments on both the supply and demand side, making anyone who tediously repeats the platitude about “the oil price being simply about supply and demand” appears somewhat simple-minded.
Whilst people may believe that their (or others) actions affect or manipulate the oil price, the reality may be that the consequences of those actions are of minor importance only.
The low oil price fluctuations are possibly due to unimagined and unfathomable factors, or complex combinations of factors.
The bottom line is that the world is much more complex these days and this makes the oil price difficult to predict. Even the fact that most commentators today believe that the oil price will stay low for at least a year or so should be taken with a grain of salt — nobody really knows.
A single war or major terrorist action could have catastrophic consequences on oil prices.
So what will happen to the oil price? As one with no pretensions of having knowledge, I predict oil price will swing in a US$50-100/per barrel range for the next few years or so, then gradually rise as population, education, prosperity and demand continues to rise, but still swinging in a fairly large range.
This $50-100/bbl range is justified as follows: Putting aside all the excuses for not being able to make predictions, including the obfuscating geopolitical conspiracy theories, it appears that a major factor is the addition of large quantities of shale hydrocarbons on the market, accessible as a result of new technology.
As oil prices increased an alternative has appeared, today in the form of shale hydrocarbons.
Shale oil is believed to cost around $85/bbl to produce — and a well’s production declines rapidly, falling by about 60 percent in the first year alone. In other words, shale hydrocarbons need new, expensive wells continuously to maintain production — below $85/bbl this will not happen and supply will reduce as wells are not drilled, increasing demand.
Recognizing that price does not rebound immediately, that there is a lag or elasticity to the price, prices may drop to a natural floor of around $50, by which point under most circumstances demand will send the price north once again.
The longer oil is “low”, then the more quickly it will swing back and likely over-shoot the $85/bbl ceiling, perhaps up to around $100/bbl, before inevitably descending once again.
Hence I believe the price will be around $50-100, the period and magnitude of the changes primarily in response to the ongoing geopolitical parlor games.
Some may accuse me of protecting myself by suggesting such a large range, but in fact I am specifically predicting there will be fluctuations in that bandwidth, with an average price around $75/bbl over the next few years.
I do, however, believe it is beyond the ability of men to predict the exact shape of the swing cycle, in terms of the period and cycle frequency.
Source: The Jakarta Post
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The writer has been working in the oil and gas business for about 30 years.
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Friday, 06 September 24
REBOUND IN OIL DEMAND COULD LIFT MARKET IN LATTER HALF OF 2024 - BIMCO
Supply/demand
Based on a strong second half demand, the supply/balance is forecast to strengthen in 2024 but weaken slightly in 2025 as n ...
Friday, 06 September 24
GLOBAL SEABORNE LNG TRADE HAS CONTINUED TO INCREASE LAST YEAR - BANCHERO COSTA
Global seaborne LNG trade has continued to increase last year, helped also by the events in Ukraine which forced Europe to diversify away from Russ ...
Wednesday, 28 August 24
SEABORNE COAL IMPORTS INTO INDIA INCREASED BY +9.9% Y-O-Y TO 146.6 MLN T - BANCHERO COSTA
Global coal trade has really picked up pace over the past year, and is now fully back to pre-Covid levels said Banchero Costa Research in its lates ...
Tuesday, 06 August 24
EXERCISE CAUTION WITH AMMONIA SWITCH - BALTIC EXCHANGE
A new study from the Massachusetts Institute of Technology (MIT) has thrown a spanner into the plan to transition ships from diesel fuel to ammonia ...
Friday, 02 August 24
ENERGY MARKET DEVELOPMENTS: COAL AND NATURAL GAS PRICES REACH RECORD HIGHS - WORLD BANK
The recent surge in natural gas and coal prices has been so swift that the main benchmarks were roughly three times higher in 2022Q2 compared to a ...
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- Uttam Galva Steels Limited - India
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- Energy Link Ltd, New Zealand
- Wood Mackenzie - Singapore
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- Minerals Council of Australia
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- Bangladesh Power Developement Board
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- Trasteel International SA, Italy
- The State Trading Corporation of India Ltd
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- San Jose City I Power Corp, Philippines
- Heidelberg Cement - Germany
- Bhoruka Overseas - Indonesia
- Eastern Coal Council - USA
- Karbindo Abesyapradhi - Indoneisa
- Anglo American - United Kingdom
- Miang Besar Coal Terminal - Indonesia
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- Posco Energy - South Korea
- Intertek Mineral Services - Indonesia
- Coal and Oil Company - UAE
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- Eastern Energy - Thailand
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- Directorate Of Revenue Intelligence - India
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- Indian Oil Corporation Limited
- Formosa Plastics Group - Taiwan
- Semirara Mining Corp, Philippines
- Global Business Power Corporation, Philippines
- Independent Power Producers Association of India
- Standard Chartered Bank - UAE
- Petron Corporation, Philippines
- Grasim Industreis Ltd - India
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- Ministry of Transport, Egypt
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- Bharathi Cement Corporation - India
- Ministry of Finance - Indonesia
- South Luzon Thermal Energy Corporation
- Offshore Bulk Terminal Pte Ltd, Singapore
- White Energy Company Limited
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- Commonwealth Bank - Australia
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- Ambuja Cements Ltd - India
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- Economic Council, Georgia
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- Aboitiz Power Corporation - Philippines
- Thai Mozambique Logistica
- Deloitte Consulting - India
- Global Coal Blending Company Limited - Australia
- London Commodity Brokers - England
- TNB Fuel Sdn Bhd - Malaysia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- PNOC Exploration Corporation - Philippines
- Electricity Generating Authority of Thailand
- Vizag Seaport Private Limited - India
- Cigading International Bulk Terminal - Indonesia
- Chettinad Cement Corporation Ltd - India
- European Bulk Services B.V. - Netherlands
- ICICI Bank Limited - India
- Parry Sugars Refinery, India
- Maharashtra Electricity Regulatory Commission - India
- Semirara Mining and Power Corporation, Philippines
- Therma Luzon, Inc, Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- GN Power Mariveles Coal Plant, Philippines
- Kobexindo Tractors - Indoneisa
- Goldman Sachs - Singapore
- Vedanta Resources Plc - India
- Baramulti Group, Indonesia
- Indo Tambangraya Megah - Indonesia
- Planning Commission, India
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- Madhucon Powers Ltd - India
- Latin American Coal - Colombia
- Globalindo Alam Lestari - Indonesia
- Carbofer General Trading SA - India
- CNBM International Corporation - China
- PetroVietnam Power Coal Import and Supply Company
- Romanian Commodities Exchange
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- Marubeni Corporation - India
- Indian Energy Exchange, India
- Ministry of Mines - Canada
- Ceylon Electricity Board - Sri Lanka
- Gujarat Mineral Development Corp Ltd - India
- Kumho Petrochemical, South Korea
- Bukit Makmur.PT - Indonesia
- Chamber of Mines of South Africa
- Makarim & Taira - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Manunggal Multi Energi - Indonesia
- Mercuria Energy - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Port Waratah Coal Services - Australia
- Interocean Group of Companies - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- AsiaOL BioFuels Corp., Philippines
- Siam City Cement PLC, Thailand
- Billiton Holdings Pty Ltd - Australia
- GMR Energy Limited - India
- VISA Power Limited - India
- Coastal Gujarat Power Limited - India
- Edison Trading Spa - Italy
- Neyveli Lignite Corporation Ltd, - India
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- Singapore Mercantile Exchange
- The University of Queensland
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- Australian Commodity Traders Exchange
- Iligan Light & Power Inc, Philippines
- Gujarat Sidhee Cement - India
- Bukit Asam (Persero) Tbk - Indonesia
- Indogreen Group - Indonesia
- Siam City Cement - Thailand
- Bukit Baiduri Energy - Indonesia
- Altura Mining Limited, Indonesia
- Star Paper Mills Limited - India
- Australian Coal Association
- Pipit Mutiara Jaya. PT, Indonesia
- Sakthi Sugars Limited - India
- Sindya Power Generating Company Private Ltd
- Georgia Ports Authority, United States
- Lanco Infratech Ltd - India
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