Oil prices have continued to plunge in the wake of OPEC’s decision not to cut oil output in support of prices at its 27 November meeting. So far, the impact of lower prices on oil demand has been slight, although US consumers have as usual been more reactive than those in countries where retail prices are less directly linked to spot prices. While US oil demand has shown some signs of improvement, there is as yet no clear-cut evidence of it happening in other parts of the world. In the eurozone, austerity measures continue to depress economic growth and a Greek exit from the EU, with damaging consequences for the rest of Europe, cannot be ruled out. In the FSU region, Russia could face its first GDP contraction since 2009 due to Western sanctions, lower oil prices and a weakening rouble. Meanwhile, any demand response to lower oil prices in US dollar terms will be partly diluted by the strength of the US dollar.
On the supply side, oil output from the US and Canada continues to rise; even though there are nascent signs of a slowdown in drilling activity, new projects completed in Q4 2014 will be ramping up production through 1H 2015. Oil supplies in Iraq and Russia surged to the highest level in decades last month, perhaps to make up for lost revenues as a result of falling oil prices. In addition, further supply increases from highly stressed OPEC members, such as Ecuador and Venezuela, are in prospect. With OPEC keeping its position on the 30 million bpd production ceiling, and a number of already-commissioned projects starting or ramping up output in non-OPEC countries, KBC expects the supply glut to continue into the first few months of 2015. However, as the low price environment persists, production trimming from non-OPEC producers from Q2 onwards will be seen.
KBC’s view is that the global energy market will only return to fundamental supply/demand balance by around late 2015. KBC expects oil prices to weaken further over the next few months, with an average of slightly below $50/bbl for Brent crude in Q1 2015. Once the market has set a floor, KBC expect some buying to come in and a new equilibrium price to be established at a slightly higher level of around US$60/bbl by Q4 2015. Overall, KBC expects Brent to average around US$55/bbl for this year, down from about US$100/bbl in 2014.
The next formal OPEC meeting is not scheduled until June 2015, but OPEC’s position is unlikely to change unless other major non-OPEC producers (such as Russia, Norway and Mexico) agree to cut their production, which is not expected. Also, Iran has another round of talks with the six major Western powers since its deadline has been extended to June 2015, with the possibility then of the return of some 1 million bpd of Iranian barrels. These talks continue to be difficult, however, so there is little chance of a breakthrough or any substantial increments from Iran by the end of this year. As demand growth is revived by the lower prices, this should give scope for modest price gains as we move into 2016.
Asia continued to enjoy favourable margins, staying well ahead of its counterparts. In contrast, margins in Europe and the USGC have been placed on a downward trend. Falling crude prices helped to boost Asian margins as Dubai crude prices lost US$16.35/bbl on the month due to a bearish demand outlook and a supply glut. Brent crude prices also dropped substantially, but failed to provide any support to European margins as product trends fared worse. Similarly, US product markets weakened, more than offsetting the decline in benchmark crude grades, thus dragging refining margins lower.
Looking forward, KBC forecasts both Asian and European margins will move in a relatively low range as significant new refinery capacity additions influence both markets. The refinery additions are centred largely in the Middle East and India, while the product surplus from these refineries will mainly impact the Asian and European product markets, thus sapping margins. In contrast, US margins are expected to improve, firming substantially from recent lows. Overall, KBC expects refining margins in 2015, compared to 2014, to be marginally better in Europe, down modestly from historical highs in the US, and steady in Asia.
Adapted from press release by Joe Green