Brent seen staying in $100-130 range
Dubai, February 21, 2013
Brent crude oil prices will stay in the $100-130/bbl range on average through 2015, while US WTI faces the risk of crashing to $50, says a new report from Bank of America Merrill Lynch.
Looking at the downside risks, the Global Energy Paper says Brent crude oil prices are unlikely to fall below an average of $80/bbl.
It provides three reasons for this: (1) rising full-loaded production costs for marginal projects in non-Opec areas, (2) rising government budget breakeven levels for key Opec countries, and (3) price elasticity of demand which suggests consumption would increase strongly at such low prices.
In the United States, however, surging shale output creates a risk of $50/bbl WTI on an 18-24 month horizon, the report said.
"The rising unconventional landlocked oil supply could push light crudes like WTI into oversupply as domestic refiners cannot soak up all the new volumes. This is already the case in some parts of the Midwest, where soaring volumes and a lack of transportation options have left WTI crude oil trading at a $20/bbl discount to Brent. Given export restrictions, seaborne light sweet grades in the US such as LLS should also start to decouple from Brent in 2013," said the report.
While oil has a strong floor at $80/bbl from a supply perspective, risks could remain skewed to the upside as long as
the Fed maintains an aggressive quantitative easing (QE) program. Given the supply constraints, Brent prices are likely to rise at a faster rate than the prices of other factors of production in the economy, the report says.
With major demand destruction episodes likely to occur when energy consumption as a share of nominal GDP reaches 9 per cent, the report sees a cap on prices at $140/bbl this year. This number should rise slowly in line with global GDP and the relative scarcity of crude oil to $175/bbl in 2017, the report said.
The non-OECD block is set to increase its oil consumption to 47 million bpd by 2014, from 33 million bpd ten years ago. In contrast, shrinking populations in developed markets are set to accelerate the ongoing oil demand contraction in the OECD, it said.
Non-Opec oil supply is expected to grow by a cumulative 3.9 million bpd from 2012 to 2017, the report said. The US will be by far the largest contributor to growth, adding 3.1 million bpd from 2012 to 2017. Canadian oil sands and ongoing developments in Brazil should also contribute significantly to non-Opec oil supplies over the next 5 years, it said.
The gap between non- Opec supply and global oil demand in the medium term will be filled by Opec barrels, mostly coming from Iraq’s contribution of 1.9 million bpd by 2017, it said.
While the period 2011-2013 can be characterized by high debt levels in developed markets (DM), a subdued US recovery and a double dip recession in Europe, global economic activity is set to rebound strongly in 2014. From 2014 to 2017, global activity is set to expand at a rate of 4-4.5 per cent, in line with the trend growth rate required to absorb new labour around the world. This acceleration in global GDP growth is set to boost oil demand growth significantly
given the high beta of oil consumption relative to GDP, the report said.
The report sees global oil demand growth of 1.3 million bpd, on average, between 2014 and 17. Global oil demand is thus poised to increase from 89.8 million bpd in 2012 to 96.1 million bpd in 2017.
The Middle East has become one of the fastest growing regions in terms of oil demand. For the last 10 years, oil consumption growth averaged 250,000 bpd per year, or 4.1 per cent per year, second only to China. Oil demand growth in Saudi Arabia rivals and often exceeds that of other emerging markets like India, Brazil and Russia. Overall, the Middle East now accounts for about 8.3 per cent of global oil demand but just 3.3 per cent of global GDP, the report said.
Moreover, the region accounts for nearly 30 per cent of global oil demand growth, making it the largest contributor outside of Asia. Electricity demand in the region has expanded at a strong rate, with power demand in Saudi Arabia growing annually at 8 per cent in the last five years. More than
30 per cent of the region's power is generated from oil. Limited growth in non-oil power generation capacity near term should add support to oil demand growth.
Saudi Arabia is the largest contributor to oil demand growth in the region, making up 75 per cent of growth in 2012. The trajectory of oil demand has been phenomenal, nearly doubling since 2000 to 3 million bpd in 2012, with annual growth currently at 155,000 bpd. Iraq has also experienced remarkable oil demand growth in recent years. Demand reached record high levels of 740,000 bpd in 2012 and has been steadily on the rise since 2007, supported by an improving security
situation. Much more so than the rest of the Middle East, the vast majority of energy consumption in Iraq is sourced from oil as opposed to natural gas. Thus, oil consumption is directly impacted by economic growth
Meanwhile, Saudi Arabia is the only country with real spare capacity. Including Iraq, total Opec crude oil output averaged 31.4 million bpd last year, just below 2008 record highs. Moreover, with NGL production also rising to the highest level ever (+383,000 bpd YoY to 6.2 million bpd), total Opec production actually hit a new record of 37.5 million bpd. The onus has largely fallen on Saudi Arabia to make up for production shortfalls as it owns almost all the spare capacity. On the latest IEA estimates, spare capacity within Opec-11 stands at 4.4 million bpd, 2.7 million bpd of which sits within Saudi Arabia alone. - TradeArabia News Service
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