Oil Prices, the shale, the plunge and outlook
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Recent development in oil prices, the shale impact and future outlook
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Oil Prices, the shale, the plunge and outlook
- 1. Oil Prices The shale, the plunge and the outlook DR. EROL METIN SEM ENERJİ, SUSTAINABILITY, ENERGY & MANAGEMENT IAEE EURASIAN CONFERENCE – AUGUST 2016 BAKU- AZERBAIJAN
- 2. 0 20 40 60 80 100 120 140 160 BRENT (USD/BBL; 2005-2016) Peak 145 $/bbl Financial recovery Global ffinancial crises Ddemand growth 2007-2008 Lowest 28 $/bbl Shale boom Steady State Deep at 35 $ Oil prices- the last 10 years Sources : IEA, Platt's 20 25 30 35 40 45 50 55 BRENT, USD/BBL 2016 49.9$/b
- 3. Oil Price Range has significant impacts on the economy of producing countries 60$ /b range is the level that covers the cost of 90% of all production techniques. 50$/b and below create high risks with many producing countries 40 $/b range above breakeven point of many OPEC countries but way too low for new investments Shale plays lie at the higher end of the non-opec marginal cost curve, as infrastructure build-outs, decline rates, high levels of rig activity keep costs high Sources : Cost Figure : Rystad Energy / Deloitte and Country Risk Figure: Oliver Wyman Analysis Average Cost $/bbl Production mb/d 60 70 80 90 80 90 10 10 20 30 40 50 70 60 50 40 30 20 $27 $41 $50 $51 $52 $65 $70 On Shore Middle East Offshore Shelf HeavyOil Onshore Russia Onshore RoW Deepwater Ultradeepwater N.America Shale OilSands Arctic OPEC Avg. Non-OPEC Avg. Global Avg.
- 4. Oil Production and Consumption- Regional Dynamics World Oil Production growth in 15 years is 22.4% Sustained production growth, avg 5 years : 1.9% 2015 growth : 3.2% Rate of increase in production is dominant in North America by 42.2%, whereas OPEC proved a stable growth by 8.8 % Rate of increase in consumption has been dominant in Asia Pacific and Middle East (17%) World Oil Consumption growth in 15 years is 23.4% Steady consumption growth, avg 5 years : 1.4% 2015 growth : 2.0 % 35.1 38.2 34.3 33.8 13.8 19.7 0 20 40 60 80 100 2010 2015 Oil Production, mb/d OPEC NON OPEC NORTH AMERICA 8.8% 42.2% 42.7 42.0 36.2 42.0 9.9 11.0 0 50 100 2010 2015 Oil Consumption mb/d Total North America + Europe Total Asia Pacific + Mid East ROW 17% Source Data : BP Statistical Review 18%
- 5. Global supply and demand approached a balanced state.. Demand growth in 2016 expected*; 1.4% mb/d Total demand expected*; 2016 : 96,1 mb/d; 2017 : 97,4 mb/d While OECD demand is not growing, demand growth in Non OECD countries dominates the growth. Source : Oil Market Report, IEA Average 1.2 mb/d oversupply in market for a period of 9Q Supply growth 600.000 b/d Total supply 2016 : 96 mb/d 46.1 45.8 46.5 45.3 46.7 46.3 46.2 46.6 45.9 46.7 46.5 46.4 45.9 47.2 47.1 48.8 49.0 49.2 48.5 48.6 49.7 50.1 50.4 49.7 42.0 43.0 44.0 45.0 46.0 47.0 48.0 49.0 50.0 51.0 2013 2014 1Q15 2Q15 3Q15 4Q15 2015 1Q16 2Q16 3Q16 4Q16 2016 Demand Growth, mb/d Demand OECD Demand Non-OECD
- 6. Perfect Storm! Three important pillars of the low oil price period 1- Implied Oversupply of the Oil Markets 2- Strong USD 3- OPEC trying to keep market share -0.6 0.8 1.5 2.2 1.3 1.7 1.6 1.3 0.2 2013 2014 1Q15 2Q15 3Q15 4Q15 2015 1Q16 2Q16 SUPPLY DEMAND BALANCE MB/D Avg 1.2 mb/d for a period of 9Q 75 80 85 90 95 100 25 45 65 85 105 125 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Oil Prices & U.S $ Crude b/$ $ TWBC Average 1.2 mb/d oversupply in market for a period of 9Q Strong USD since the end of 2014, trade weighted basket OPEC not imposing quota keeping the growth Sources: Oil Market Report EIA, World Bank and OPEC
- 7. Contributors and consequences Middle East back in Playfield A period of slower demand growth in Asia Pacific Iraq’s oil production shows steady increase , 1.1 mbd increase in 2015 reaching to 4.0 mbd Iran, after sanctions, now back to the stage with potential to add 1.0 mbd capacity in 2016 Low Oil prices has led to lower energy investments. Total annual investment in Energy has dropped from 90b$ to around 40b$ in a period of 3 years. Around 200 energy investment projects being pushed back on an annual basis Economic growth in China, representing 40% of the growth of the world oil consumption has slowed down The equivalent demand dropped by 1.0 mbd compared to 2014 levels. Sources: BP Statistical Review and World Bank
- 8. Oil Prices and Supply Demand Characteristics * past 10 years • Oil prices have rallied between 30$ - 140$ range over the last 10 years. The main drivers were; 2005-2008: Demand growth, slow response from production, OPEC politics on higher prices, instabilities in oil producing countries. 2008 : Global financial crisis 2008-2014 : Economic recovery, OPEC politics toward high prices and balanced s/d, price level allowed new investments 2014- 2016 : Sustained over supply, new technologies, production increase in Mid East, OPEC’s market share 2017 - .. : Potential balanced s/d outlook ? Graph a sensitivity chart.. % oversupply vs price variation Changein drives Pricing and investments strongly influenced by slow / conventional productions techniques Producers and political stabilities determine the boundaries of the price band New technologies allow very fast exploration to production stages , in large quantities Less impact from producers cartels More fluid, therefore more volatile markets More rigid, less volatile Less rigid, more volati le
- 9. Surge of Oil Production in US US oil production increased around 1.0 mbd every year since 2012 Approximately 4.0 mbd production increase from 2012 to 2015 ; equivalent to Iraq’s production From 2008 to 2014, total US oil production has risen dramatically by 73% from around 5.0 to 8.6mbd Shale Oil production was very quick, reaching to 5.0mbd level in five years time The shale sectors contribution to GDP was about 1.5% Source: US Energy Information Administration
- 10. Shale Oil has been the name of the game
- 11. Future Outlook – Influencers of the S/D characteristics and price outlook 1. Can the Shale Oil Industry sustain production levels with low oil prices and for how long ? 2. How the Oil Producing Countries (mainly OPEC) would respond to the new Economics of Oil ? 3. What has been the impact of low oil prices in the Conventional World and to the investments in E&P world ? 4. How the policies around the climate change and environmental policies and would the technological developments in the Renewable Energy Industry make energy prices competitive to oil ? IMPORTANT DISCUSSION POINTS
- 12. Can the Shale Oil Industry sustain production levels with low oil prices and for how long ? Bakken Region Permian Region Source: US Energy Information Administration Eagle Ford Region
- 13. Can the Shale Oil Industry sustain production levels with low oil prices and for how long ? Significant drop in the number of active rigs since 2015, Increased productivity per well Reduced operating costs, at a level of 30$ The upward production trend would be temporarily disrupted 50-70$/b level could trigger idled rigs back to action quickly Shale Oil revolution likely to continue until at least 2020 but with much slower rate! Production mbd Tight oil Other fluids 15 mbd HistoryHistory Projection Tight Oil Natural Gas Plant Fluids Bio Fuels Crude Oil Other Fluids 2015 2040 10 mbd 15 mbd US Production of Petroleum and other liquids 2000 -2040 2000 Source: Energy Information Administration Active Rigs
- 14. How the Oil Producing Countries (mainly OPEC) would respond to the new Economics of Oil ? • OPEC has chosen to stay competitive on pricing in November 2014 Represents 40% of the Oil Market Low cost production compared to shale Longer term continuity per well Higher Spare capacity Large yet to find fields OPEC likely continue to remain on the market prices with no quota impose to push prices up 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 1Q-03 4Q-03 3Q-04 2Q-05 1Q-06 4Q-06 3Q-07 2Q-08 1Q-09 4Q-09 3Q-10 2Q-11 1Q-12 4Q-12 3Q-13 2Q-14 1Q-15 4Q-15 3Q-06 2Q-17 OPEC Spare Capacity, mb/day 1213.4, 81% 279.2, 19% Proven Oil Reserves, bn b OPEC Non-OPEC Sources: BP Energy Outlook and OPEC
- 15. What has been the impact of low oil prices in the Conventional World and to the investments in E&P world ? • Spending on Exploration and new investments has fallen down by almost 50% since 2014 • Reduced investments likely to remain low next 5 years • Total World Rig count dropped significantly since the beginning of the low oil price period • North America Investment spending by the global oil industry has fallen by $1 trillion since prices collapsed in 2014. Add notes McKenzie .. New projects on exp. Source: Wood McKenzie Source: Energy Information Agency, US
- 16. How the climate change and environmental policies would effect the demand side ? Source: World Bank Source: Oil and Gas Journal The impact of the climate change, in terms of water and food resources will be more prominent in Mid East, North Africa and Asia Pacific leading to more pressure on GDP growth in these regions Significant cost reductions achieved in renewables, mainly in Solar Systems have a potential for fast growth and therefore oil industry will be more dependent on transport industry. High Oil Reserve regions likely to see more pressure due to effects of the climate changes
- 17. Outlook for the Oil Prices? Main driver of the oversupply, shale oil production increase in the U.S. has slown down Since low Oil Prices, significant reduction in investments and exploration activities Demand would likely to continue at a pace of 1.2- 1.4mbd rate , leading to a more balanced S/D characteristics. Shale Oil, by nature, quick to response market conditions Existing stocks might suppress the S/D driven price hike towards in 4Q of 2016 • Oil price likely to increase in 2017 • Forecast expectations dominate around 55 $ range for 2017 and moving up to 65-70$ range in 2018 Survey by WSJ on Sept 2015: 2016 average 58.7$/b Source: Wall Street Journal (above) and collected data from EIA, EIU, World bank, Morgan Stanley, Barclays
- 18. Conclusions Perfect storm, a combination of over supply, strong $ and weakened demand was the main driver of the oil price plunge. Conditions of perfect storm no longer exist leading to more balanced supply demand characteristics and therefore markets are expected to see a price increase in 2017. Although forecasting on future outlook of oil prices has proven “big surprises” for many experts, there exists sufficient technical base for price range of 50-60 $ /b in 2017. Shale Oil, although the production hike has ended and reached to a stable level in the US, the potential for duplication in other countries and versatility of the new technologies to expand quickly in the existing fields, still warrants a quick pick up of the production Lack of investments, mainly in offshore projects and new exploration projects would impact the production growth in the conventional side, whereas OPEC would have the potential to fill the gap.
Notes de l'éditeur
- Excellencies, distinguished guests, Ladies and Gentlemen Welcome to the International Association for Energy Economics, 1st Eurasian Conference. It is great that this conference is being held in Azerbaijan , a very important country with significant oil and gas reserves; very much in line with the objectives of the meeting. I will be presenting an outlook of oil prices with a focus on the last three years where prices have plunged and therefore, created significant fiscal pressures in oil producing countries such as Azerbaijan, caused substantial investment cuts in especially large scale exploration projects. On the other hand several important developments have taken place mainly in shale technologies while oil importing countries benefiting from the low energy prices, to balance their budgets.
- Oil Prices, as known to many of us, is a very important indicator of the world economy. It represents somewhat less than 10% of the world economy, and represents 2.5% of the world GDP. Therefore, the oil prices have always been at the center of world’s economy and politics. The World’s Oil Industry is big. It is Capital Big with around 400 billion$ annual investment range, a price change of 10$ per barrel has an immense impact on many country’s income and the financial figures of oil companies. Over the last ten years the prices have gone through some important cycles, impacting the world economy and energy industries. We have seen a peak at 145 $ in 2008, mainly driven by strong demand followed by a sharp drop due to global financial crises going down to 35$ in a period of 2 months. With the slow financial recovery after the global crises we have seen a period of 100-110$ price range fore more than 3 years, at which time almost all the experts had agreed that this would be the next lowest range for the coming years. However, to a surprise to many, we had another hard plunge with the beginning of 2015 where the prices have seen a lowest of many years with 28$/b in January 2016. Now, while we are approaching the last quarter, 50 $ range has now been reached with a potential to continue to increase further. As of Friday, the closing value for Brent was 49.92, just below 50$
- To understand the implications of oil prices lets look at the standard production cost chart shown here. The graph indicates that 60$ oil price is the range where around 90% of the world’s oil production recovers the cost to produce. 50$ price range represents the global average cost of oil production. Below this level while some countries are under significant pressure either due to the large population that they have to finance through oil revenues or because they consumed an important part of their existing reservoirs that they have to invest more to balance their economies. 40 $ and below is the range where only OPEC countries can recover their existing costs to produce. This graph proves that the world has seen a low oil prices below $50 range, which represents almost half of the oil production operating under cash deficit. In this respect a long period of low prices have had significant impacts on national economies of many of the producing countries. The chart on the right, produced by ………………. Claims that countries like Russia, Iraq and Venezuela, perhaps Azerbaijan as well, have felt the financial pressure more than the Countries like Saudi Arabia, and Kuwait, where the cost of production is under 30$. oil and gas revenues constitute an important portion of the export revenues of these countries and cost of production, due to nature of the reservoirs, are usually above the low oil price period the world has experienced so far.
- Oil prices are effected by many variables, obviously supply and demand characteristics is one of the main factor. Lets look at the oil production and consumption patterns, world wide and regional basis. On the production side, as shown on the left hand side of the slide, oil production over the last 15 years have shown a constant growth of around 22.4%. If we breakdown this period to look at the last 5 years where the period of low oil prices have some impact, we can see that an average of 1.9% production growth have been achieved; which is a very strong signal of a well supplied market. Only in 2015 Year on Year production grew by 3.2%. The graphic on the bottom left shows the production of oil by region. North America has been the center of growth over the last five years ramping up total production by around 42%, while OPEC countries pumped up 8.8% more than what they have pumped up in 2010, enough to meet the average consumption growth. On the demand side, the last 15 years growth was 23.4% equivalent of the production increase over the same period. The breakdown of the last 5 years where the low oil prices represent almost half of this period, the average consumption growth was 1.4%, 0.5% less than the production growth during the same period. The demand growth mainly came from Asia Pacific, China being the main driver, as quite known to all. Another important point to note , is that North America and Europe oil consumption has not increased at all within the last 15 years period, in fact the consumption trend is downwards in these regions.
- Again this chart clearly shows the difference in the consumption levels of OECD countries and non OECD countries. On the slide shown at the left, the growth in consumption is continuous in non OECD countries whereas in OECD countries consumption remained practically constant around 46mbd. Recent analysis by IEA estimates that 2016 demand growth would be 1.4% compared to 2015 and expected to be 96.1mbd, again the demand growth coming from non OECD countries. If we analyze in more detail the supply vs demand over the last 3 years period, with an implied assumption that stocks have maintained its existing levels with a balanced overall effect throughout the same period, we see a particularly interesting phenomenon starting from the beginning of the 2014. The figure at the right hand side shows that starting from 2014, the oil market has entered into a period of oversupply. While supply / demand is more balanced before 2014, oil market has started to enjoy more supply than the consumption / demand.
- If we look at this implied imbalance between the supply and demand curves, it is obvious that starting from 2014 the market has seen an oversupply of crude, for a period of more than 2 years. A simple math shows an implied 1.2mbd oversupply continuously for a period of 9quarters. This was the same period where the oil prices plunged from around 100$ to 40 $ range with a deep at 25 $ in January 2016. The low oil price period has been the topic of various researches in order to evaluate whether the production hike oversupplying the market, by itself, is accountable for this plunge. Although there is a general consensus that this is the main reason for the plunge there may be some other factors as well helping this process. One additional factor was the strong $. The graph in the middle shows how the Trade Weighted Balance Currency , index for US $ versus the Oil Price, which resembles a transpose of each other. Starting with mid 2014, the world has witnessed a strong US $ period. While the production hike is dominating the markets, it was also a period when US$ was strong against other currencies and remained strong during the period of low oil prices. The strong $ was definitely an additional factor to the supply glut in causing oil prices to fall. A third contributing factor is OPEC’s behavior. The response of OPEC to this process was the topic of many debates before the OPEC meeting held in November 2015. However, the outcome was not the quota implementation as usually the way that OPEC has reacted. OPEC decided not to intervene with market winds and tried to maintain their market share, with a belief that the shale boom was not to stay to long especially in a low oil price environment. This was unique, compared to previous years, where OPEC took actions to maintain oil prices parallel to their expectations. All three factors together was enough to create the so called perfect storm.
- In addition to the conditions of this “perfect storm” leading to a plunge of oil prices, we need to look at some other important factors, which may have helped or might have caused some consequences that may lead to sustain the low price levels, for longer times. One important factor is the recent developments in the Middle East, i.e. the return of Iraq to the production environment and very recently return of Iran to the market after a period of sanctions. Two countries together represent some stability in the oil producing fields, production increase which practically adds an additional 2.0 mbd to the existing production levels, with some more capacity increase potential in coming years. Meanwhile, on the demand side, we have seen a relatively stable term, although a period of stabilization started which slowed down of the growth of the Chinese economy. For Chinese economy the growth rates of 10-11% has no longer been there. Recent Chinese economic growth, although more than twice of the average world GDP growth, remained around 6-7%. This practically means a drop of 1.0-1.5 mbd (???) in the oil consumption. Practical consequence of all these is a significant reduction in the world’s energy investments. According to the World Bank report, total annual energy investments in the world dropped from around 90b$to around 40b$. Annually, an average of 200 investment projects have been pushed back, leading to serious concerns around future capabilities to meet the growing demand. We have to remind ourselves that, the total growth in demand still relatively strong with an average of 1.4% growth.
- The rally of oil prices, fluctuating between 30-140$ over the last 15 years depicts some fundamental changes in the market behaviors. During the period between 2005 and 2008, the prices grew constantly under the influence of strong demand growth within an environment where production ramp up was just enough to meet the demand. This ment the markets are prone to regional unstabilities, production shortages or climate conditions that cause disruptions in supply chain. The financial crises followed up by the economic recovery where the oil prices remained relatively stable between 100-120 $ allowed infrastructure investments to be made. With the significant production growth due to shale technologies, as we just discussed, since the beginning of 2014, we have entered a low price period. The main characteristics of the market is now changed. The change, in the production side, is from conventional world where the producers attitude and political stabilities determining the boundaries of the game field, to a production environment where quick gains can be achieved with the new advances in the area of shale. In other words markets have moved from a more rigid towards a more fluid markets, as some experts called “the new economics of the oil market”.
- Let us review the main cause of the production hike in more detail. The reasons behind US oil production increase. The graph on the left shows US Oil production starting from 1980’s which shows a constant decline Since the beginning of 2012 the oil production the US has started to increase by around 1.0mbd almost every year. The production level in 2012 was around 5.2 mbd ramping up to a total of 9.4mbd in 2015. Current production levels is around 8.5mbd. This was done by the introduction of shale production techniques. The technology behind the shale production has gone through a significant research and development process since 1940’s. In other words the technology was there and known. However, only when the horizontal drilling and hydraulic fracturing – as referred to as fracking- to release hydrocarbons from a much wider area than was possible with traditional vertical drilling, the shale boom came to reality. Compared with traditional hydrocarbon production, the exploitation of shales presently characterized by high well output in the first few months, followed by very sharp declines. With the deployment of the new shale technology, along with the deployment of substantial investments between 2008 and 2012, the shale oil and gas production has reached to several mbd within a few years. What is also amazing is the fact that that US investments into shale oil and gas has reached to some 90b$ around 2012. These investments in the shale industry have yield an overall direct employment of 360.000. This employment figure raises to 1.7 million when direct and indirect employments are summed up together. Therefore the shale revolution was not only the reason of the immense surge of oil production but also one of the main reasons behind the growth of US economy leading to a strong $. The shale sector’s contribution to US GDP was about 1.5%, a highly impressive figure.
- Just to share with you with the pictures of this shale development, Just look at the air view of one of the well known shale fields in the U.S.A. It is like one well at each and every kilometer dispersed in a very large landscape. The horizontal drilling technology combined with increase in the number of stages allowed wells to operate more efficiently maximizing the area of shale exposed to the fractures. Benefits include substantial savings in time and and cost as well as significantly increased recovery rates per well. The infogram on the right side shows a comparative figures and output levels. While in 2000 there were only 23.000 fracking wells active in the US, by 2010 the number has increased to 300.000 wells with an increase output of 4.3 mbd. The two pictures taken from space, shown on the left side shows the immense scale change. While in 2003 we see a very few lights showing operations, the same field in 2013 all light up with shale operations like a grid, demonstrating this immense development within a very short amount of time.
- What does this leads to us, obviously is the question. How long can this be sustained, what would be the outlook for the Oil Prices and how the industry will be shaped in coming years?. The answer to this question is important for many oil producing countries that are under fiscal pressure. I would like to discuss this topic with you under the frame of five important elements. The answer would be a blend of these. 1- Can the shale industry sustain these levels for long times and remain profitable at low price ranges? 2- How would the Conventional World and OPEC react ? 3- What has been the impact of the low oil price period to the investments and how would this effect the enactment of the new projects ? 4- How likely the demand side would show another hike in near future ? What would be the effect from renewables side, as new technologies and more cost effective projects are coming to live, and how strong the impact from the climate change actions to effect the demand on hydro carbons ?.
- The projections from Energy Information Administration of the U.S.A, shows some slight decline in the shale production in 2016 and perhaps in 2017 but afterwards maintain a slow constant growth in Shale Production. In other words, the upward production trend of the shale would be temporarily disrupted. According to the data, the level of shale production would reach to around 6 mbd level in 2020. This hypothesis could be supported by the vast availability of other shale fields, the responsiveness of the shale technology to higher oil prices, i.e. 50$ range is a profitable range for many shale fields since some of the investments have been capitalized and the ability of the shale technology in achieving productivity from existing shale fields through numerous technological achievements. Recent data from the US E.I.A proves this trend that oil prices picking up from 40$ range and testing 50$, an immediate response was the increase in the number wells put in to production. (give numbers here…………………) The above graph showing the total number of shale rigs vs oil production is another proof of the productivity increase in the shale technology. Since 2015 While the number of active rigs going straight down, the level of total oil production remained relatively the same. Therefore, future expectations are such that shale production would continue to grow at least until 2020, but with a slower rate of increase compared to the rate observed during 2013-2015.
- Now lets look at what is happening in OPEC countries and what are the expectations for near future. OPEC represents around 40% of the world oil production. The 2016 energy outlook recently published by BP projects that OPEC would remain as the main producing block in the supply side for many years more. In addition to low cost nature of the producing fields of the OPEC Countries , the spare capacity of production which averaged 1.6 million b/d in 2015, is expected to be 1.5 million b/d in 2016 and 1.3 million b/d in 2017, provides a stronger tool to be deployed when conditions arise. Surplus capacity is another indicator of market conditions, and surplus capacity below 2.5 million b/d indicates a relatively tight oil market. However, high current and forecast levels of global oil inventories make the forecast low surplus capacity less significant. In addition, OPEC Countries are in possession of more than 80% of the proven oil reserves of the world with around 1213 billion barrels of oil. The proven reserves, compared to the shale represents much more stable production capability with breakeven points less than 35$ range. As we discussed before, whale shale is more fluid and by nature can be more flexible to adopt to a dynamic market conditions, conventional techniques have more dependencies and more stable in production. Therefore, OPEC’s response to the oil prices is still very important. Next meeting is scheduled at end of September and the recent price range of 48-50 $ is likely to motivate the Ministers again take the same stand . i.e. remain competitive and let the market conditions define the price. This is what Saudi Oil Minister recently said to Reuter’s to back off the recent rumors that OPEC is likely to freeze the production. If we assume OPEC would retain its existing position, than we might expect oil prices to maintain 50 $ range and tend to move upward in the 2017. The recent projections from eia and iea support this simple judgement.
- Another important point to review would be the effect of low oil prices to the investments world. Wood McKenzie has published some reports recently to show the impact on the E&P investments worldwide. According to these reports world’s spending on the exploration and new investments has fallen down by almost 50% since 2014, as a response to low oil prices. The annual spending of exploration world between 2008 and 2012 was around 90bn$, and this has dropped to below 40bn $. This essentially means that, at least in the conventional world, the pick up of the investments to respond market demands would likely to be slow. The data from Wood McKenzie about the cash flow position of the Oil Companies further support the fact that the world of exploration and research has practically dried out to a level just to maintain existing projects with substantial cost savings implementations. This is further supported by the rig count rate shown on the right side. As shown in the chart, there is a significant drop in the total rig count, even we exclude the sharp drop in the USA, due to shale’s market responsive behavior. Again, the evidences from the new project implementations indicate a more balanced oil market is likely to dominated next couple of years.
- Another important parameter is the climate change and developments in the renewables industries. Global change in climate will accelerate with changes in global and regional temperatures, precipitations, land use, sea level rise and ocean affiliations. The global average change in world’s surface temperature is expected to increase by 1.9-2.6C by 2050. The impact of the climate change will be predominantly channeled through the water cycle, with consequences that could be large and un even across the globe. According to a report published by world bank recently, unless action is not taken, scarcity will greatly worsen in regions where water is already in short supply, such as Middle East and the North Africa. These regions might see up to 6% GDP decline due to water related impacts on agriculture, health, infrastructural needs and incomes. -These regions, mainly Middle East, seem to be under more risks then the rest of the world, are also the regions where majority of world’s proven reserves. Middle east and Africa account for 55% of the world’s proven oil reserves and 50% of the proven gas reserves. This might suggest that in the longer term, towards the mid of the century, according to some calculations peak oil has reached, the oil rich countries would be under more economic pressure due to environmental risks, mainly water scarcity. It is however, difficult, even not realistic, in short term period climate change would have such a strong effect on the oil prices. -In addition, the climate change policies in EU and North America has provided significant incentives in the renewables. Recent developments in wind and solar energy systems has shown substantial cost reductions. As an example Photovoltaics system costs has been reduced by around 80% within the last 10- 15 years. These developments in renewables industry, would likely suppress the demand on oil and gas industries.
- Now lets move to the hot topic. The obvious question is what would be the oil prices in coming months and years. AS our walk through the prices, the factors that effect market conditions such as shale outlook, OPEC’s behavior, world demand growth have shown that there are some fundamental changes in oil market dynamics, moving from more rigid structure to a more fluid markets due to quick and massive response capability of the shale industry. -Some important conclusions are, the implied supply demand is going to show a balanced markets. The price range that all the players seem to be going for is above 50$ range. Lack of sufficient large scale investments in the exploration field would support this analysis. -Recent survey by WSJ in September 2015 showed an indication towards 58$ for the year 2016, which seems not achievable as of today. However, all other short term forecasts continue to show an upward trend we are likely to see a 55$ price range in 2017, still moving upwards in 2018. -In the lower graph a collection of some recent projections and estimates on oil prices. Although direct and simple comparison of these estimations is quite difficult, since they might be based on different assumptions, some are projections and some are estimates, the fact that there is an accumulation around 55-60$ range for the price expectations in 2017 and 60-65 $ range in 2018, can be taken as a indication of general consensus on oil price outlook.. This is quite consistent with the facts that has been presented here in this presentation, which is more focused on supply and demand dynamics. -I do agree with these expectations based on the facts that 1) Shale boom is over, but will be there to produce 2) Additional production coming from Iraq and Iran, slower demand and more balanced outlook : we are likely to see 55-60$ in the second half of 2017, and 60-70$ range in 2018.
- In conclusion, The oil prices have faced a “perfect storm” starting at June 2014, where oversupply of the market was the predominant reason behind, but strongly supported by a strong US$ and OPEC’s behavior. These conditions are no longer exist, except OPEC’s behavior, which we will here during the ……………….. Conference to be held at the end of September. A balanced outlook is there to stay for the next couple of years. Although forecasting on future outlook of oil prices has proven, historically, “big surprises” for many experts, I believe there exists sufficient technical base for price range of 50-60 $ /b in 2017. Shale Oil, although the production hike has ended and reached to a stable level in the US, the potential for duplication in other countries and versatility of the new technologies to expand quickly in the existing fields, still warrants a quick pick up of the production. The recent increase in the number rigs parallel to the recent price increases is an indication that Shale production would likely to respond the upward price movements. Lack of investments, mainly in offshore projects and new exploration projects would impact the production growth in the conventional side, whereas OPEC would have the potential to fill the gap, due to low investment costs required to explore new fields in the >Middle East