February Industry Affairs

EIA forecasts lower oil prices, higher inventories in 2016



By OGJ editors

In its February Short-Term Energy Outlook (STEO), the US Energy Information Administration forecast Brent crude prices to average $37.52/bbl in 2016, compared with a previous forecast of $40.15/bbl. West Texas Intermediate prices are expected to average $37.59/bbl, down from $38.54/bbl forecasted last month. For 2017, EIA raised its outlook for WTI to $50/bbl from $47/bbl, while leaving the Brent forecast at $50/bbl.

In the report, EIA forecast global oil inventories to increase by annual average of 1 million b/d in 2016 and by an additional 300,000 b/d in 2017, both higher than previous forecasts.

EIA estimates global consumption of petroleum and other liquid fuels increased 1.4 million b/d in 2015, averaging 93.8 million b/d for the year. EIA expects global consumption to rise 1.2 million b/d in 2016 and 1.5 million b/d in 2017, compared with forecasts of 1.4 million b/d for both years in last month’s STEO.

Non-OPEC production

EIA expects production outside of the Organization of Petroleum Exporting Countries to decline 600,000 b/d in 2016, which would be the first decline since 2008. Most of the forecast production decline in 2016 is expected to be in the US, due to high decline rates and relatively short investment horizons. Non-OPEC production is forecast to decline 200,000 b/d in 2017.

“Forecast total US liquid fuels production declines by 500,000 b/d in 2016, as low oil prices contribute to drilling rig counts falling below levels required to sustain current production. In 2017, US liquid fuels production is relatively flat,” EIA said.

“The expectation of reduced cash flows in 2016 and 2017 has prompted many companies to scale back investment programs, deferring major new undertakings until a sustained price recovery occurs. The prospect of higher interest rates and tighter lending conditions will likely limit the availability of capital for many smaller producers, giving rise to distressed asset sales and consolidation of acreage holdings by more financially sound firms.”

EIA forecasts that US crude oil production will decrease from an average of 9.4 million b/d in 2015 to 8.7 million b/d in 2016 and to 8.5 million b/d in 2017.

Outside the US, forecast non-OPEC production declines by 100,000 b/d in 2016 and by 300,000 b/d in 2017. Despite low crude oil prices, production declines are relatively minor because of investments committed to projects when oil prices were higher. Additionally, recent strength in the US dollar and cost reductions have moderated the effects of declining oil revenues on production in some countries.

Among other non-OPEC producers, the largest declines are forecast to be in the North Sea and Russia, EIA said.

OPEC production

Forecast OPEC crude oil production increases 700,000 b/d in 2016 and 600,000 b/d in 2017, with Iran accounting for most of the increase. EIA assumes that a collaborative production cut among OPEC members and other major producers does not occur in the forecast period, as major OPEC producers continue the strategy to maintain market share.

“Iran’s crude oil production, which averaged 2.8 million b/d in 2015, is forecast to average more than 3.1 million b/d in 2016 and almost 3.6 million b/d in 2017, with the actual outcome dependent on Iran’s ability to mitigate production decline rates, deal with technical challenges, and bring new oil fields online,” EIA said.

World's Largest Energy Trader Sees a Decade of Low Oil Prices

February 8, 2016

12:00 AM CST

By Javier Blas and Ryan Chicote


Oil prices will stay low for as long as 10 years as Chinese economic growth slows and the U.S. shale industry acts as a cap on any rally, according to the world’s largest independent oil-trading house.

"It’s hard to see a dramatic price increase," Vitol Group BV Chief Executive Officer Ian Taylor told Bloomberg in an interview, saying prices were likely to bounce around a band with a midpoint of $50 a barrel for the next decade.

"We really do imagine a band,” probably between $40 and $60 a barrel, he said. "I can see that band lasting for five to ten years. I think it’s fundamentally different."

The lower boundary would imply little recovery for Brent crude, the global benchmark, which traded for $33.38 a barrel at 10:16 a.m. Monday on the London-based ICE Futures Europe exchange. The upper limit would put prices back to the level of July 2015, when the oil industry was already taking measures to weather the crisis.

The forecast, made as the oil trading community’s annual IP Week gathering starts in London, would mean oil-rich countries and the energy industry would face the longest stretch of low prices since the 1986-1999 period, when crude mostly traded between $10 and $20 a barrel.

Vitol trades more than 5 million barrels a day of crude and refined products -- enough to cover the needs of Germany, France and Spain together -- and its views are closely followed in the oil industry.

Taylor, a 59-year-old trader-cum-executive who started his career at Royal Dutch Shell Plc in the late 1970s, said he was unsure whether prices have already bottomed out, as supply continued to outpace demand, leading to ever higher global stockpiles. However, he said that prices were likely to recover somewhat in the second half of the year, toward $45 to $50 a barrel.

For the foreseeable future, Taylor doubts the oil market would ever see the triple-digit prices that fattened the sovereign wealth funds of Middle East countries and propelled the valuations of companies such as Exxon Mobil Corp. and BP Plc.

"You have to believe that there is a possibility that you will not necessarily go back above $100, you know, ever," he said.

The problem is that "there is so much more supply" while the global economy is more efficient in consuming crude. On top of that, Iran is returning to the market and growth in emerging markets, the biggest engine of oil demand, is slowing.

"China has changed," he said.

Oil prices plunged after the Organization of Petroleum Exporting Countries in November 2014 diverged from its traditional policy of adjusting supply to manage prices, announcing it would maintain output to defend its position in the market. The group formally dropped any production limits in December, boosting output and intensifying a price war against higher-cost producers including U.S. shale operations, the North Sea, Canada’s tar sands and deep-water discoveries in Brazil and Angola.

Taylor said there could be an agreement between OPEC and non-OPEC countries like Russia to cut production. "It’s probably slightly against, 60-40 against, but it’s a real possibility," he said.

Saudi Arabia held talks in Riyadh Sunday with Venezuela, which is trying to drum up support for a coordinated oil-output cut to buttress prices. While Saudi Oil Minister Ali al-Naimi said he held “successful” talks with his Venezuelan counterpart Eulogio del Pino on ways of cooperating to stabilize the market, he didn’t specify any steps producers could take to shore up prices.

Higher Profits

While the price slump has hurt oil producers, independent traders such as Vitol and its competitors Trafigura Group Pte, Glencore Plc, Gunvor Group Ltd, Castleton Commodities International LLC and Mercuria Energy Group Ltd. are profiting from the increase in volatility.

These companies also benefit from a market structure called contango -- where forward prices are higher than current costs. This allows traders to buy oil, store it in tanks and use derivatives to lock in a higher selling price for a later date.

Taylor said that Vitol, which celebrates its 50th anniversary this year and is owned by its employees, would report net income for 2015 above the $1.35 billion it earned in 2014. However, he said the company wouldn’t match the record of almost $2.3 billion of 2009. Taylor said that the company, which doesn’t publicly release its profit, planned to take writedowns in its exploration and production business and make provisions against customers defaulting on contracts. The company, formally based in Rotterdam, has its major trading floors in London, Geneva, Singapore and Houston.