NrgEdge Editor

Sharing content and articles for users
Last Updated: May 3, 2016
1 view
Business Trends
image

The Wall Street Journal has conducted a survey in April 2016 to get an overview of the oil prices direction in the next few quarters as seen by 13 investment banks. And despite the current rally in oil prices, the survey shows that analysts are doubting the rally and apparently many of them are still in the pessimism state. 

According to the survey, investment banks' forecasts for oil prices have not changed much from a similar survey conducted by The Wall Street Journal in March 2016. The survey shows that the banks see Brent crude and West Texas Intermediate averaging $41 and $39 a barrel this year respectively. That represents a change of only $1 up from March's survey for Brent crude and no-change from March's survey for West Texas Intermediate. 

While few investment banks' forecasts fall in a range close to the current direction of the oil prices, a notable forecast that points to a different direction is coming Morgan Stanley. The reputable investment bank along with other investment banks such as ING and BNP see oil prices falling in the third quarter of 2016. Although the analysts at Morgan Stanley have predicted the fall of oil prices to $20s earlier this year, they are now wrong in their forecast and here is why. 

1- Morgan Stanley's forecast ignores the change in fundamentals

Some analysts including those at Morgan Stanley believe that the current rally in oil prices could mimic last year’s when Brent crude increased about $20 a barrel between January and May before falling later in the year. They are also worried about the current U.S. stockpiles and the potential for increased oil output from Iran. Although these threats are real, the analysts seems to be ignoring the fact that circumstances have changed.

Last year when oil prices jumped about $20 a barrel between January and May, the oil market downturn was just at its beginning. According to the EIA, the global oil over-supply (supply minus demand) was growing at that time where it increased from about 2 million barrel per day in January 2015 to about 2.3 million barrel per day in May 2015 before reaching its highest level at 2.51 million barrel in August 2015. Crude oil supply was increasing dramatically while demand was lagging.

U.S. crude oil production was also growing during that time where it increased from about 9.15 million barrel a day in January to about 9.4 million barrel a day in May before hitting its highest level at 9.6 million barrel a day in July 2015. It is obvious that during the January-to-May 2015 rally, all sentiments were pointing toward a further fall in oil prices and that is exactly what happened from May 2015 onward.

But this year, things are totally different than they were in 2015, from fundamentals to oil market cycle emotions. First of all, unlike the January-to-May 2015 rally, U.S. crude oil output is dwindling at an accelerating decline rate. The U.S. crude oil production has fallen from 9.2 million barrel a day in January 2016 to 8.9 million barrel a day in April 2016. U.S. rig count is also experiencing a sharp and continuous decline since the beginning of 2016. According to Baker Hughes, U.S. Rig Count is down 485 rigs from last year at 905, and the decline in rig count is still intensifying. 

In addition to that, the global over-supply is easing with supply decreasing and demand increasing. According to IEA's Oil Market Report, global oil supplies fell from about 97.2 million barrel a day in the 4th quarter of 2015 to about 96.2 million barrel per day in the 1st quarter of 2016. Demand has also improved since last year where the global demand increased from 93.6 million barrel a day in the 1st quarter of 2015 to about 94.8 million barrel a day in the 1st quarter of 2016. 

Currently, the oil market fundamentals are totally different from those during the January-to-May 2015 rally, yet analysts chose to ignore these changes and focus on events such as the increase of Iran's oil output which time has proven it has little to no effect on the oil market.

2- Morgan Stanley's forecast is not consistent with the market cycle emotions

Back in January 2016, when analysts at Morgan Stanley and other investment banks predicted oil prices to fall to $20 a barrel, they did it at the right time. Eventhough oil prices didn't fall to the level they have predicted, it fell below $30 a barrel. At that time, the oil market was at its worst state, pessimism was ruling everything. And when the analysts predicted prices to fall to $20 a barrel and below, what they did was fueling the pessimism and pressuring oil prices to fall. Unfortunately, they succeeded in dragging oil prices down only because they played with the right emotion in the right direction at the right time.

But that is not the case now with their current pessimistic forecast. They are playing with the wrong emotion in the wrong direction at the wrong time. Right now, the oil market cycle emotion is optimism and events that have taken place in the oil market during the last few weeks support this fact. For instance, despite the failure of Doha's meeting, and the fact that Iran is ramping up its oil output, oil prices were able to sustain their gains and continued increasing. In fact, just a few days after the failure of Doha's meeting, oil prices continued their gains, breaking out of a trading band. This shows the high level of optimism the oil market is in right now which some analysts underestimate its ability to drive prices up.

It should be clear by now that the direction of the oil market at this moment is different from that predicted by Morgan Stanley's analysts and other investment banks which suggest that oil prices would fall again in the coming months. Judging by the improvement in oil market fundamentals and the current high level of optimism in the market, oil prices will continue its rally and it could reach to $50 a barrel in the coming weeks.

It is expected that oil prices will remain in a range between $40 to $60 per barrel till the end of 2016. Oil traders at this moment are very optimistic and they are looking for a hope in anything whether it is the weakening U.S. dollar or the declining U.S. crude oil output and rig count. Hope and optimism is required to get the market out of this period and sustain oil prices at the current level or a little bit higher till market fundamentals improvement intensifies. Once the oil market fundamentals play its role completely, it will take charge of balancing the market and driving oil prices.

April 30, 2016 I By Alahdal A. Hussein

Mrogan Stanley oil price forecast market cycle oil analysts 2016 oil prices
3
0 0

Something interesting to share?
Join NrgEdge and create your own NrgBuzz today

Latest NrgBuzz

Your Weekly Update: 11 - 15 February 2019

Market Watch

Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b

  • Oil prices remains entrenched in their trading ranges, with OPEC’s attempt to control global crude supplies mitigated by increasing concerns over the health of the global economy
  • Warnings, including from The Bank of England, point to a global economic slowdown that could be ‘worse and longer-lasting than first thought’; one of the main variables in this forecast are the trade tensions between the US and China, which show no sign of being solved with President Trump saying he is open to delaying the current deadline of March 1 for trade talks
  • This poorer forecast for global oil demand has offset supply issues flaring up within OPEC, with Libya reporting ongoing fighting at the country’s largest oilfield while the current political crisis in Venezuela could see its crude output drop to 700,000 b/d by 2020
  • The looming new American sanctions on Venezuelan crude has already had concrete results, with US refiner Marathon Petroleum moving to replace Venezuelan crude with similar grades from the Middle East and Latin America
  • While Nicolas Maduro holds on to power, Venezuela’s opposition leader Juan Guaido has promised to scrap requirements that PDVSA keep a controlling stake in domestic oil joint ventures and boost oil production through an open economy when his government-in-power takes over
  • Despite OPEC’s attempts to stabilise crude prices, the US House has advanced the so-called NOPEC bill – which could subject the cartel to antitrust action – to a vote, with a similar bill currently being debated in the US Senate
  • The see-saw pattern in the US active rig count continues; after a net loss of 14 rigs last week, the Baker Hughes rig survey reported a gain of 7 new oil rigs and a loss of 3 gas rigs for a net gain of 4 rigs
  • While demand is a concern, global crude supply remains delicate enough to edge prices up, especially with Saudi Arabia going for deeper-than-expected cuts; this should push Brent up towards US$64/b and WTI towards US$55/b in trading this week


Headlines of the week

Upstream

  • Egypt is looking to introduce a new type of oil and gas contract to attract greater upstream investment into the country, aiming to be ‘less bureaucratic and more efficient’ with faster cost-recovery, ahead of a planned Red Sea bid round encompassing over a dozen concession sites
  • Lukoil has commenced on a new phase at the West Qurna-2 field in Iraq, with 57 production wells planned at the Mishrif and Yamama formation that could boost output by 80,000 boe/d to 480,000 boe/d in 2020
  • Aker BP has hit oil and natural gas flows at well 24/9-14 in the Froskelår Main prospect in the Alvheim area of the Norwergian Continental Shelf
  • Things continue to be rocky for crude producers in Canada’s Alberta province; production limits were increased last week after being previously slashed to curb a growing glut on news that crude storage levels dropped, but now face trouble being transported south as pipelines remain at capacity and crude-by-rail shipments face challenging economics

Midstream & Downstream

  • The Caribbean island of Curacao is now speaking with two new candidates to operate the 335 kb/d Isla refinery after its preferred bidder – said to be Saudi Aramco’s American arm Motiva Enterprises – withdrew from consideration to replace the current operatorship under PDVSA
  • America’s Delta Air Lines is now reportedly looking to sell its oil refinery in Pennsylvania outright, after attempts to sell a partial stake in the 185 kb/d plant failed to attract interest, largely due to its limited geographical position

Natural Gas/LNG

  • Total reports that it has made a new ‘significant’ gas condensate discovery offshore South Africa at the Brulpadda prospect in Block 11B/12B in the Outeniqua Basin, with the Brulpadda-deep well also reporting ‘successful’ flows of natural gas condensate
  • Italy’s Eni and Saudi Arabia’s SABIC have signed a new Joint Development Agreement to collaborate on developing technologies for gas-to-liquids and gas-to-chemicals applications
  • The Rovuma LNG project in Mozambique is charging ahead with development, with Eni looking to contract out subsea operations for the Mamba gas project by mid-March and ExxonMobil choosing its contractor for building the complex’s LNG trains by April
February, 15 2019
SHORT-TERM ENERGY OUTLOOK

Forecast Highlights

Global liquid fuels

  • Brent crude oil spot prices averaged $59 per barrel (b) in January, up $2/b from December 2018 but $10/b lower than the average in January of last year. EIA forecasts Brent spot prices will average $61/b in 2019 and $62/b in 2020, compared with an average of $71/b in 2018. EIA expects that West Texas Intermediate (WTI) crude oil prices will average $8/b lower than Brent prices in the first quarter of 2019 before the discount gradually falls to $4/b in the fourth quarter of 2019 and through 2020.
  • EIA estimates that U.S. crude oil production averaged 12.0 million barrels per day (b/d) in January, up 90,000 b/d from December. EIA forecasts U.S. crude oil production to average 12.4 million b/d in 2019 and 13.2 million b/d in 2020, with most of the growth coming from the Permian region of Texas and New Mexico.
  • Global liquid fuels inventories grew by an estimated 0.5 million b/d in 2018, and EIA expects they will grow by 0.4 million b/d in 2019 and by 0.6 million b/d in 2020.
  • U.S. crude oil and petroleum product net imports are estimated to have fallen from an average of 3.8 million b/d in 2017 to an average of 2.4 million b/d in 2018. EIA forecasts that net imports will continue to fall to an average of 0.9 million b/d in 2019 and to an average net export level of 0.3 million b/d in 2020. In the fourth quarter of 2020, EIA forecasts the United States will be a net exporter of crude oil and petroleum products by about 1.1 million b/d.

Natural gas

  • The Henry Hub natural gas spot price averaged $3.13/million British thermal units (MMBtu) in January, down 91 cents/MMBtu from December. Despite a cold snap in late January, average temperatures for the month were milder than normal in much of the country, which contributed to lower prices. EIA expects strong growth in U.S. natural gas production to put downward pressure on prices in 2019. EIA expects Henry Hub natural gas spot prices to average $2.83/MMBtu in 2019, down 32 cents/MMBtu from the 2018 average. NYMEX futures and options contract values for May 2019 delivery traded during the five-day period ending February 7, 2019, suggest a range of $2.15/MMBtu to $3.30/MMBtu encompasses the market expectation for May 2019 Henry Hub natural gas prices at the 95% confidence level.
  • EIA forecasts that dry natural gas production will average 90.2 billion cubic feet per day (Bcf/d) in 2019, up 6.9 Bcf/d from 2018. EIA expects natural gas production will continue to rise in 2020 to an average of 92.1 Bcf/d.

Electricity, coal, renewables, and emissions

  • EIA expects the share of U.S. total utility-scale electricity generation from natural gas-fired power plants to rise from 35% in 2018 to 36% in 2019 and to 37% in 2020. EIA forecasts that the electricity generation share from coal will average 26% in 2019 and 24% in 2020, down from 28% in 2018. The nuclear share of generation was 19% in 2018 and EIA forecasts that it will stay near that level in 2019 and in 2020. The generation share of hydropower is forecast to average slightly less than 7% of total generation in 2019 and 2020, similar to last year. Wind, solar, and other nonhydropower renewables together provided about 10% of electricity generation in 2018. EIA expects them to provide 11% in 2019 and 13% in 2020.
  • EIA expects average U.S. solar generation will rise from 265,000 megawatthours per day (MWh/d) in 2018 to 301,000 MWh/d in 2019 (an increase of 14%) and to 358,000 MWh/d in 2020 (an increase of 19%). These forecasts of solar generation include large-scale facilities as well as small-scale distributed solar generators, primarily on residential and commercial buildings.
  • In 2019, EIA expects wind’s annual share of generation will exceed hydropower’s share for the first time. EIA forecasts that wind generation will rise from 756 MWh/d in 2018 to 859 MWh/d in 2019 (a share of 8%). Wind generation is further projected to rise to 964 MWh/d (a share of 9%) by 2020.
  • EIA estimates that U.S. coal production declined by 21 million short tons (MMst) (3%) in 2018, totaling 754 MMst. EIA expects further declines in coal production of 4% in 2019 and 6% in 2020 because of falling power sector consumption and declines in coal exports. Coal consumed for electricity generation declined by an estimated 4% (27 MMst) in 2018. EIA expects that lower electricity demand, lower natural gas prices, and further retirements of coal-fired capacity will reduce coal consumed for electricity generation by 8% in 2019 and by a further 6% in 2020. Coal exports, which increased by 20% (19 MMst) in 2018, decline by 13% and 8% in 2019 and 2020, respectively, in the forecast.
  • After rising by 2.8% in 2018, EIA forecasts that U.S. energy-related carbon dioxide (CO2) emissions will decline by 1.3% in 2019 and by 0.5% in 2020. The 2018 increase largely reflects increased weather-related natural gas consumption because of additional heating needs during a colder winter and for additional electric generation to support more cooling during a warmer summer than in 2017. EIA expects emissions to decline in 2019 and 2020 because of forecasted temperatures that will return to near normal. Energy-related CO2 emissions are sensitive to changes in weather, economic growth, energy prices, and fuel mix.

U.S. residential electricity price

  • West Texas Intermediate (WTI) crude oil price
  • World liquid fuels production and consumption balance
  • U.S. natural gas prices
  • U.S. residential electricity price
  • West Texas Intermediate (WTI) crude oil price
February, 13 2019
The State of the Industry: A Brightened 2018

2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?

Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.

ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.

But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.

Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.

So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.

Supermajor Net  Profits for 4Q18 and 2018

1. ExxonMobil:

- 4Q18 – Net profit US$6 billion (-28%);

- 2018 – Net profit US$20.8 (+5.7%)

2. Shell:

- 4Q18 – Net profit US$5.69 billion (+32.3%);

- 2018 – Net profit US$21.4 billion (+36%)

3. Chevron:

- 4Q18 – Net profit US$3.73 billion (+19.9%);

- 2018 – Net profit US$14.8 billion (+60.8%)

4. BP:

- 4Q18 – Net profit US$3.48 billion (+65%);

- 2018 - Net profit US$12.7 billion (+105%)

5. Total: 

- 4Q18 – Net profit US$3.88 billion (+16%);

- 2018 - Net profit US$13.6 billion (+28%)

February, 12 2019