Douglas-Westwood: the oil price tide will turn

In their January Oil Monthly Report, the IEA noted  “A price recovery – barring any major disruption – may not be imminent, but signs are mounting that the tide will turn” and their demand growth forecast of 900 000 bpd for 2015 was maintained. They are not alone, the EIA expects global consumption to grow by 1.0 million bpd in both 2015 and 2016, and some forecasts suggest US gasoline demand may, in 2015, grow by the most since the 1970s as falling prices boost consumption.

Oil prices are presently being held down by oversupply – but for how long? Production from wells declines naturally at some 9% p.a., and even with costly intervention at perhaps 5% p.a. With global demand at some 92 million bpd, this suggests a requirement to replace in excess of 4.5 million bpd of production in 2015 and more in 2016, etc., but where will the new oil come from? The IEA has suggested the US oil production may grow by 0.5 million bpd in 2015 but could start to peak as early as 2016.

Investment in production is already being hard hit. Around 400 000 low output stripper wells each pump less than 10 bpd, but in total produce three-quarters of a million bpd and are prime candidates. At the other end of the scale, BHP Billiton for example has said it would cut back on its planned US$4 billion spending on its US shale assets. Projects underway worldwide will of course add production and OPEC probably already has near 2.5 million bpd of spare capacity. So overall, we may reach a point of balance in 2015 - 16 and then see undersupply of oil and rising prices. Furthermore, we must not forget there is always potential for supply disruption, OPEC has at times lost some 2 million bpd, non-OPEC producers near 1.2 million.

The bottom line is that unless we keep adding production, surplus capacity will be quickly eroded. The next oil price surge is already being set up.

John Westwood, Douglas-Westwood London

Adapted by David Bizley

Published on 26/01/2015

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