Oil Market Perspective
Benchmark crude oil prices remained almost steady in the first half of 2014. OPEC basket price averaged $104.79 for January 2014-May 2014 period, vacillating between $101 and $107 a barrel.
In June 2014, unexpected advances by Daesh (ISIS) in Iraq and growing concerns about the impact of the terrorist group’s operations on Iraqi oil production drove oil prices up. The prices soared past $110 on June 20. But after Daesh’s advances towards oil-rich regions in southern Iraq halted in late June, the market jittery was calmed down. Then, oil prices started falling.
Table 1: 2014 Crude Oil Prices ($/barrel)
|
|
OPEC Basket |
Dubai |
Dated Brent |
WTI |
|
|
2013 Average |
105.94 |
105.51 |
108.69 |
97.87 |
|
|
January 2014 |
104.71 |
104.01 |
108.26 |
94.9 |
|
|
February 2014 |
105.38 |
105.04 |
108.87 |
100.78 |
|
|
March 2014 |
104.15 |
104.32 |
107.55 |
100.53 |
|
|
April 2014 |
104.27 |
104.68 |
107.69 |
102.02 |
|
|
May 2014 |
105.44 |
105.55 |
109.67 |
102.03 |
|
|
June 2014 |
107.89 |
108.03 |
111.66 |
105.24 |
|
|
July 2014 |
105.61 |
106.13 |
106.64 |
102.87 |
|
|
August 2014 |
100.75 |
101.73 |
101.56 |
96.38 |
|
|
September 2014 |
95.98 |
96.47 |
97.3 |
93.36 |
|
|
October 2014 |
85.06 |
86.73 |
87.41 |
84.43 |
|
|
November 2014 |
75.57 |
76.33 |
78.9 |
76.04 |
|
|
December 2014 |
59.46 |
60.25 |
62.53 |
59.5 |
|
The downward trend in oil prices continued in the third and fourth quarters of 2014. The prices experienced a record 50% drop from June 20 to December 31. OPEC basket prices fell to $52 per barrel on December 31, 2014.
Numerous factors contributed to the sharp fall in oil prices. Chief among them were as follows:
- Subsidence of Political Crises Affecting Oil Market: In the first half of 2014, a variety of geopolitical factors including the crisis in Ukraine, Zionist Regime invasion of the Gaza Strip, the war in Syria, Iran’s nuclear issue and the emergence of Daesh in Iraq swayed the oil market. But in the second half of the year, these crises subsided to some extent and concerns about possible halt in oil supply were allayed.
- Non-OPEC Record Output Hike, Particularly Shale Oil Production in US: Non-OPEC crude oil production increased significantly in 2014. Oil output by these countries rose from 41.28 mb/d in 2013 to 1.23 mb/d in 2014, while their gas condensate production reached 6.71 mb/d, up 40,000 b/d year-on-year. Moreover, non-OPEC unconventional oil production grew 257,000 b/d to reach 4.76 mb/d. In 2014, the excess in non-OPEC oil supply stood at 1.89 mb/d, much higher than global growth in demand.
- Lower-Than-Expected Increase in Global Demand: At the beginning of 2014, the Organization of the Petroleum Exporting Countries estimated the global demand for oil to increase 1.2 mb/d. But the figures released at the end of the year indicated lower-than-expected growth for demand. In its monthly market review for January 2015, OPEC’s estimate for growth in demand in 2014 was reported at 1 mb/d, 200,000 b/d below its previous estimates. In early 2014, the International Energy Agency (IEA) had estimated the global demand for oil to grow 1.3 mb/d. By the end of the year, the IEA cut its estimate to 600,000 b/d, less than half of the initial estimates.
- Growing Oil and Petroleum Products Stocks Due to Ample Supply and Sliggish Demand: Throughout 2014, the market was oversupplied with oil. The market saw 1.1 mb/d, 1.5 mb/d, 0.6 mb/d and 0.5 mb/d of oil oversupply during the four quarters of the year, respectively. That caused crude oil and petroleum products stocks to increase significantly. To that effect, member states of the Organization for Economic Co-operation and Development (OECD) increased their strategic stocks to 2,678 million barrels in December 2014 from 2,567 mb/d in January that year. That was enough for 58.6 days demand by these countries.
- OPEC Overproduction Capacity: Oil overproduction capacity among OPEC member states has been an important factor affecting oil prices. In early 2014, the overproduction capacity for all OPEC member states stood at 4.86 mb/d, excluding 3.33 mb/d share of Iran, Iraq, Nigeria and Libya. Although OPEC excess capacity fell to 3.99 mbd by the end of the year, its total excess capacity has reached 3.39 mb/d without taking into consideration the quotas of Libya, Nigeria, Iraq and Iran. That indicates that the oil market is not so worried about production capacity shortages.
- Libya Oil Output Hike: In 2014, Libya’s oil production was an influential factor on the price of oil. After the 2012 removal of its long-time dictator Moammer Gaddafi, Libya’s oil production fell sharply, but it rebounded very quickly and reached 1.4 mb/d in the first half of 2013. As political tensions increased and internal dispute simmered between forces that contributed to the downfall of Gaddafi, oil production in Libya started falling from the middle of 2013 to reach 213,000 b/d in May 2014. But the rival groups reached agreement and oil production started growing in 2014 to reach 880,000 b/d in October that year. Libya’s oil production hike in the second half of 2014 due to market oversupply did not have any special impact on the downward trend in oil prices.
- OPEC’s Non-Intervention: Ever since oil prices started falling in July 2014, many oil market analysts were waiting for an emergency ministerial meeting of OPEC to cut its production ceiling in order to shore up prices, but OPEC did hold no emergency meeting and it opted to keep its production ceiling unchanged at 30 mb/d in its regular meeting in November 2014. Some OPEC member states including Iran and Venezuela were in favor of a cut in production ceiling, but Saudi Arabia, United Arab Emirates, Qatar and Kuwait firmly opposed any reduction in the OPEC output ceiling.
- Dollar Value Appreciation: Throughout 2013 and during the first half of 2014, the US administration was injecting $80 billion per month into the country’s economy through buying bonds. That caused the dollar to depreciate against other major currencies. But in the second half of 2014, the US ended its bond purchase activities and the dollar became stronger in value. In June 2014, the euro was traded at $1.38, but by the end of the year, the conversion rate fell to 1.2. Since the oil price is set in dollars, the strengthening of the greenback caused further decline in oil prices.
- A group of other factors including China’s slow economic growth rate and weak demand for oil, production hike in Iraq, less purchase by speculators in future oil markets, oil price discount by some Persian Gulf producers particularly Saudi Arabia, slowdown in Japan’s economic growth and the strength of the possibility of a nuclear deal between Iran and six world powers further drove the prices down.
2015 Outlook
In 2014, oil demand grew at a slower pace than oil supply; therefore, the market was oversupplied. The same trend is forecast to continue in the first and the second quarters of 2015 before seeing a slight improvement in the third quarter of the year. In the fourth quarter, global demand for oil is expected to increase and the market would experience equilibrium in supply and demand.
In its monthly review for January 2015, OPEC estimated the global demand for oil to stand at 91.3 mb/d, 91.2 mb/d, 92.9 mb/d and 93.8 mb/d, respectively in the fourth quarters of the year. The average is 92.3 mb/d, up 1.1 mb/d from a year ago.
Non-OPEC supply is estimated to reach 57.5 mb/d, up 1.3 mb/d from the year before. Lower supply by non-OPEC oil producers and growing demand for oil in 2015 will cause demand for OPEC oil to reach 30 mb/d in the last quarter of 2015. In case, OPEC adheres to its production ceiling, the market will be balanced by the end of the year.
2015 Supply & Demand Forecasts (mb/d)
|
|
2012 |
2013 |
2014 |
Q1 2015 |
Q2 2015 |
Q3 2015 |
Q4 2015 |
2015 |
Changes Yr/Yr |
|
Global Demand |
89.0 |
90.2 |
91.2 |
91.3 |
91.2 |
92.9 |
93.8 |
92.3 |
1.1 |
|
Non-OPEC Supply |
52.9 |
54.2 |
56.2 |
57.7 |
57.4 |
57.3 |
57.6 |
57.5 |
1.3 |
|
OPEC Gas Condensate and Unconventional Oil Supply
|
5.6 |
5.6 |
5.8 |
5.9 |
6.0 |
6.1 |
6.2 |
6.0 |
0.2 |
|
Total Supply, Excluding OPEC Crude Oil Production
|
58.4 |
59.9 |
62.0 |
63.6 |
63.3 |
63.4 |
63.8 |
63.5 |
1.5 |
|
Demand for OPEC Oil
|
30.5 |
30.3 |
29.1 |
27.8 |
27.8 |
29.5 |
30.0 |
28.8 |
-0.3 |
|
OPEC Crude Oil Production
|
31.1 |
30.2 |
30 |
|
|
|
|
|
|
|
Total Global Supply
|
89.6 |
90.1 |
92.1 |
|
|
|
|
|
|
|
Market Equilibrium |
0.6 |
-0.1 |
0.9 |
|
|
|
|
|
|
However, the most unpredictable issues which largely affect oil prices in the short term are non-fundamental factors. The bulk of the world’s oil is produced in the Middle East, North Africa, West Africa, Latin America and Eurasia. But these oil-rich regions do not enjoy political stability. Any crisis in either of these regions would cause a halt to their oil supply and significantly affect oil prices. Moreover, we ought to wait and see what OPEC and non-OPEC oil producers would do in the second half of the year because the current level of oil prices is not acceptable to most oil exporters.