Brent crude is once again flirting with the US$80/b level. By the time October begins, it is likely that Brent prices will be comfortably over the mark, pulling WTI prices up towards the same level. The last time crude prices surged (and sustained) above this level, US$80/b was identified as the level where demand destruction began, as countries and companies scaled back on oil usage. Since the price crash in 2015, demand has managed to pick up tremendously, in no small part due to cheap prices. Where do prices go from here? Can they return to the US$100/b level? That would be cheery news for oil firms, who are finally emerging from a tough slump, but it could also return us to the excesses of the previous cycle, repeating the same problems.
The direction for oil prices – at least for the foreseeable futures – is definitely up. The main thrust for this is Iran. Or rather, renewed American sanctions on Iran. Though the Trump administration’s aim to reduce Iranian crude exports to zero is probably a pipe dream – in no small part due to pushback from India and China – the sanctions will still manage to remove at least 1 million b/d from the market. At a time when Venezuela production is in a downward spiral and disruption continually threatens OPEC’s North African members, this supply risk is constantly pushing prices levels up. OPEC has vowed to turn on the spigots in association with its NOPEC partners, but not to a level that can offset all the losses, to appease members such as Iran and Iraq. This is unlikely to be revised drastically at the upcoming OPEC meeting in December. The US is not happy about the situation – witness President Trump’s flailing tweets – and the American Congress is considering an anti-cartel bill that could open OPEC to lawsuits, all to rectify a situation that it itself created.
Because of this, major oil trading houses and banks are predicting prices to rise even further. Goldman Sachs, which once famously predicted prices could spike to US$200/b during the 2008 boom, is curiously cautious in maintaining its prediction at a floor of US$80/b, as is Citibank. JP Morgan, however, expects Brent to hit US$85/b as early as November, on a path to rise to US$90/b. Trading houses are more bullish. Mercuria and Trafigura are both predicting US$100/b prices by early 2019 – citing the lack of spare capacity in the market to replace lost volumes. Even the shale rush in the US that has made America the world’s largest crude producer will not be enough to replace lost Iranian volumes in the short- and medium-term. Most analysts expect the Iranian losses to be at least 1 mmb/d, with some analysts predicting that Iranian exports would fall to just 700,000 b/d from 2.1 mmb/d last year, shipped mostly to China and to India, with land routes used to circumvent shipping and insurance sanctions.
At prices like this, one would expect oil producers to rush in to fill the gap. But pipeline infrastructure limitations in the Permian are hampering distribution to Gulf Coast export hubs, while promising upstream production in Guyana, Mexico and Australia are still far, far off from commercialisation. Meanwhile, vast new LNG facilities has come onstream, together with major natural gas finds, accelerating oil’s displacement by gas in key sectors such as power and petrochemicals. Meanwhile, oil firms expect the bonanza to continue; service firms, particularly deepwater-focused ones, are seeing enthusiastic signs, as firms push towards riskier projects made economical only at high oil prices. This has happened before, as most would remember, but the oil industry has a short memory. Where will crude prices go from here? Nobody can agree on the exact magnitude, but everyone agrees that the direction is up.
Factors influencing the rise to US$100/b oil:
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Source: U.S. Energy Information Administration, Electric Power Monthly
Renewable generation provided a new record of 742 million megawatthours (MWh) of electricity in 2018, nearly double the 382 million MWh produced in 2008. Renewables provided 17.6% of electricity generation in the United States in 2018.
Nearly 90% of the increase in U.S. renewable electricity between 2008 and 2018 came from wind and solar generation. Wind generation rose from 55 million MWh in 2008 to 275 million MWh in 2018 (6.5% of total electricity generation), exceeded only by conventional hydroelectric at 292 million MWh (6.9% of total generation).
U.S. solar generation has increased from 2 million MWh in 2008 to 96 million MWh in 2018. Solar generation accounted for 2.3% of electricity generation in 2018. Solar generation is generally categorized as small-scale (customer-sited or rooftop) solar installations or utility-scale installations. In 2018, 69% of solar generation, or 67 million MWh, was utility-scale solar.
Source: U.S. Energy Information Administration, Electric Power Monthly
Increases in U.S. wind and solar generation are driven largely by capacity additions. In 2008, the United States had 25 gigawatts (GW) of wind generating capacity. By the end of 2018, 94 GW of wind generating capacity was operating on the electric grid. Almost all of this capacity is onshore; one offshore wind plant, located on Block Island, off the coast of Rhode Island, has a capacity of 30 megawatts. Similarly, installed solar capacity grew from an estimated less than 1 GW in 2008 to 51 GW in 2018. In 2018, 1.8 GW of this solar capacity was solar thermal, 30 GW was utility-scale solar photovoltaics (PV), and the remaining 20 GW was small-scale solar PV.
Growth in renewable technologies in the United States, particularly in wind and solar, has been driven by federal and state policies and declining costs. Federal policies such as the American Reinvestment and Recovery Act of 2009 and the Production Tax Credit and Investment Tax Credits for wind and solar have spurred project development.
In addition, state-level policies, such as renewable portfolio standards, which require a certain share of electricity to come from renewable sources, have increasing targets over time. As more wind and solar projects have come online, economies of scale have led to more efficient project development and financing mechanisms, which has led to continued cost declines.
Conventional hydroelectric capacity has remained relatively unchanged in the United States, increasing by 2% since 2008. Changes in hydroelectric generation year-over-year typically reflect changes in precipitation and drought conditions. Between 2008 and 2018, annual U.S. hydroelectric generation was as low as 249 million MWh and as high as 319 million MWh, with hydroelectric generation in 2018 totaling 292 million MWh. Generation from other renewable resources, including biomass and geothermal, increased from 70 million MWh to 79 million MWh in the United States between 2008 and 2018, and it collectively represented 1.9% of total generation in 2018.
Headline crude prices for the week beginning 11 March 2019 – Brent: US$66/b; WTI: US$56/b
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