According to EY’s Oil & Gas US quarterly outlook, after more than three years of US$100 – 110/bbl for oil, prices collapsed by nearly 50% in late 2014 as the market lost its ‘manager’ after OPEC refused to cut production.
Combined with modest oil demand growth since 2010, restored production in countries like Libya and Iraq and the huge increase of US light tight oil production, OPEC’s decision has contributed to a massive supply/demand imbalance and the resulting price drop.
The sharp decline in prices has also impacted global gas markets, as oil linked LNG has fallen to levels on par with hypothetical US LNG export prices.
Deborah Byers, the Oil & Gas Leader for Ernst & Young LLP in the US, commented: “Five years ago the worry was ‘peak oil’ and whether or not we’d have enough oil supply, but now the concern is ‘peak demand’. Unless there is an unexpected change in the supply/demand balance, a substantial oil surplus – and hence low oil prices – could continue through the first half of 2015”.
The International Energy Agency (IEA) expects oil demand growth to be lower in 2014 – less than 0.8% or less than 1 million bpd. Growth in 2015 is expected to be only slightly higher. At the same time, the IEA forecasts continued strong gains in non-OPEC oil production, primarily led by the Americans.
Based on current forecasts of oil demand and non-OPEC supply, in the first half of 2015, the market is expected to need substantially less than 30+ million bpd of crude from OPEC, the amount the cartel has been producing and vowed to keep producing. If OPEC holds to its vow and continues to produce more than 30 million bpd and there are no unexpected supply outages, the market could see a surplus of as much as 1.5 – 2 million bpd in the first half of 2015.
By the second half of the year, the price collapse is expected to cause US production growth to slow somewhat, but critically, not to reverse. Seasonal demand increases will also play a factor in the slightly improving supply/demand fundamentals.
Although US natural gas prices have weakened less than oil prices, they are still declining due to continued high production, weak early winter demand, relatively high gas storage levels and the decline in NGL prices. As a result of their link to oil prices, global gas prices also declined in Q4. Most notably, the oil price collapse has minimised the advantage of spot priced gas since oil linked LNG trading prices are now essentially on par with hypothetical US LNG exports.
“Despite the weakening price spread, US LNG projects are still very competitive due to their low capital costs and the supply is attractive for flexibility and diversity”, Byers said. “However, the LNG projects that don’t yet have contracts for their outbound gas will face much more pressure, as Asian buyers have less incentive to sign new contracts”.
Refining margins declined in Q4, except in Asia, although 2014 was a solid year overall, EY reports. Average annual margins across the globe were down slightly except in the US East and Gulf Coasts. Refiners in the US Midwest had another strong year; though their advantage has lessened as transportation bottlenecks were removed. Notional cracking margins on a New York Mercantile Exchange 3-2-1 basis recovered to approximately US$25/bbl during the year before sliding again in Q4.
Looking forward, refining margins are likely to come under pressure in Q1 2015 as more refining capacity comes online amid high global inventories and with only modest oil demand growth. The expected narrowing US crude differentials will also limit some of the advantage of the US refiners.
Global oil and gas transaction activity posted a solid fourth quarter and a big rebound in 2014 as total reported deal value rose 10% quarter over quarter and 67% year over year. However, total deal volume was down 39% in Q4 and 20% for the year. Global upstream deals followed a similar trend as deal volumes were down 22% during 2014, while upstream deal values rose 21% higher than the previous year.
Midstream transactions continued to dominate the space during Q4 with 19 deals in North America alone for a reported value of US$56.6 billion. Oilfield services also had a very good Q4, powered by the Halliburton/Baker Hughes deal.
Mitch Fane, the Oil & Gas Transaction Advisory Services leader for Ernst & Young LLP in the US, said: “Looking forward, the oil price collapse will spur increased transaction activity during 2015 for a couple of reasons. On the one hand, upstream companies with strong balance sheets operating in low cost basins will be well positioned to not only weather the dip in oil prices, but also scoop up assets from those with less liquidity or more capital intensive assets. At the same time, companies across the O&G segment will be pressured to review and reshape their portfolios to optimize capital and create higher returns”.
Adapted from a press release by Emma McAleavey.