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2015-01-25 17:39:00

OIL PRICE COLLAPSE

OIL PRICE COLLAPSE

After more than three years of US$100-110 per barrel oil, prices collapsed by nearly 50 percent in late 2014 as the market lost its "manager" after OPEC refused to cut production.

Combined with modest oil demand growth since 2010, restored production in countries like Libya and Iraq and the huge increase of US light tight oil production, OPEC's decision has contributed to a massive supply/demand imbalance and the resulting price drop.

The sharp decline in prices has also impacted global gas markets, as oil-linked LNG has fallen to levels on par with hypothetical US LNG export prices.

"Five years ago, the worry was 'peak oil' and whether or not we'd have enough oil supply, but now the concern is 'peak demand'," said Deborah Byers, the Oil & Gas Leader for Ernst & Young LLP in the US. "Unless there is an unexpected change in the supply/demand balance, a substantial oil surplus — and hence low oil prices — could continue through the first half of 2015."

Oil

The IEA expects oil demand growth to be lower in 2014 — less than 0.8 percent or less than 1 million barrels per day. Growth in 2015 is expected to be only slightly higher. At the same time, the IEA forecasts continued strong gains in non-OPEC oil production, primarily led by the Americas.

Based on current forecasts of oil demand and non-OPEC supply, in the first half of 2015, the market is expected to need substantially less than 30+ million barrels per day of crude from OPEC, the amount the cartel has been producing and vowed to keep producing. If OPEC holds to its vow and continues to produce more than 30 million barrels per day and there are no unexpected supply outages, the market could see a surplus of as much as 1.5-2 million barrels per day in the first half of 2015.

By the second half of the year, the price collapse is expected to cause US production growth to slow somewhat, but critically, not to reverse. Seasonal demand increases will also play a factor in the slightly improving supply/demand fundamentals.

Gas

Although US natural gas prices have weakened less than oil prices, they are still declining due to continued high production, weak early-winter demand, relatively high gas storage levels and the decline in NGL prices. As a result of their link to oil prices, global gas prices also declined in Q4. Most notably, the oil price collapse has minimized the advantage of spot-priced gas since oil-linked LNG trading prices are now essentially on par with hypothetical US LNG exports.

"Despite the weakening price spread, US LNG projects are still very competitive due to their low capital costs and the supply is attractive for flexibility and diversity," Byers said. "However, the LNG projects that don't yet have contracts for their outbound gas will face much more pressure, as Asian buyers have less incentive to sign new contracts."

Downstream

Refining margins declined in Q4, except in Asia, though 2014 was a solid year overall. Average annual margins across the globe were down slightly except in the US East and Gulf Coasts. Refiners in the US Midwest had another strong year; though their advantage lessened as transportation bottlenecks were removed. Notional cracking margins on a New York Mercantile Exchange 3-2-1 basis recovered to around $25 per barrel during the year before sliding again in Q4.

Looking forward, refining margins are likely to come under pressure in Q1 2015 as more refining capacity comes on line amid high global inventories and with only modest oil demand growth. The expected narrowing US crude differentials will also limit some of the advantage to US refiners.

Oilfield services

Monthly global rig counts are not yet reflecting low oil prices due to reporting time periods; though the US weekly rig counts are now starting to decline. Reductions in upstream spending will have little impact on short-term production, but should start to slow growth in US production.

In 2015, capital expenditures may be cut as much as 20-25 percent as companies seek to keep debt levels under control and slow production growth. Upstream operators are expected to put significant pressure on oilfield services supplies to reduce costs. In response, oilfield services firms will fight to retain market share through both innovation and consolidation.

Transactions

Global oil and gas transaction activity posted a solid fourth quarter and a big rebound for 2014 as total reported deal value rose 10 percent quarter over quarter and 67 percent year over year. However, total deal volume (i.e., the total number of deals) was down 39 percent in Q4 and down 20 percent for the year. Global upstream deals followed a similar trend as deal volumes and were down 22 percent during 2014, while upstream deal values rose 21 percent higher than the previous year.

Midstream transactions continued to dominate the space during Q4 with 19 deals in North America alone for a reported value of $56.6 billion. Oilfield services also had a very good Q4, powered by the Halliburton/Baker Hughes deal.

"Looking forward, the oil price collapse will spur increased transaction activity during 2015 for a couple of reasons," said Mitch Fane, the Oil & Gas Transaction Advisory Services leader for Ernst & Young LLP in the US. "On one hand, upstream companies with strong balance sheets operating in low-cost basins will be well-positioned to not only weather the dip in prices, but also scoop up assets from those with less liquidity or more capital intensive assets. At the same time, companies across the O&G segment will be pressured to review and reshape their portfolios to optimize capital and create higher returns."

oilandgaseurasia.com

Tags: OIL, PRICES, OPEC, US, LNG

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