Crude Oil

World Commodity Forecasts Industrial Raw Materials - Main report: May 1st 2014

Crude oil

Demand

The Economist Intelligence Unit expects global oil consumption to grow by an average of 1.6% in 2014-15. This is a slight downward revision to our last forecast, as we have become more negative on the outlook for Russian oil demand as we expect the economy there to struggle as a result of political tensions and a slow start to the year for consumption in China. However, we maintain our view that US oil consumption will expand in 2014-15 as the recovery there consolidates. Oil consumption growth in the OECD will be flat as the higher consumption in the US will be offset by a further contraction of consumption in Europe and the Pacific region. Outside the developed world, oil consumption will grow by 3.2% in 2014-15, slightly below its previous five-year average. Consumption growth is not expected to reach the highs of the last decade as a result of increasing efforts at efficiency gains and conservation (both in the OECD and some parts of the non-OECD), as well as some substitution with other, cheaper, and in some cases cleaner, fuels.

Outlook for US consumption growth is positive

We are becoming increasingly confident that the US will record another year of positive oil consumption growth following a trend reversal in 2013 when consumption rose by around 2%. Extremely cold weather in the first few weeks of the year drove up demand for home heating oil products, which has been reflected in stock drawdowns (some of which are now being rebuilt). Although economic performance in the first quarter has been negatively affected by the cold weather, we maintain our positive outlook for the US economy, and oil consumption, for 2014. Continued improvement in the jobs market, in particular, will support stronger automotive sales (which jumped by nearly 7% month on month in March). Retail petrol (gasoline) prices have also been accommodative by historic standards as they are more closely aligning with rising domestic output of crude oil, rather than reflecting international grades, which are often subject to upward volatility. We maintain our forecast of US consumption growth of 0.6% in 2014 and a slightly slower growth rate for 2015.

We do not expect any change in US policy on restricting crude oil exports in 2014 and hence refiners will remain incentivised to process lower-cost domestically produced crude and sell on refined products into the global market. Further increases in supply into 2015 suggest that retail fuel prices will remain affordable, helping to support positive demand growth. However, there are some caveats to this stronger demand trajectory. US refineries have historically been geared towards processing heavier, foreign crude grades and conversion to refining the lighter, locally produced oil is expensive and will eat into refining margins, capping demand from this sector. At the margin, consumption will also be constrained by a trend towards substitution by (cheaper and cleaner) natural gas, notwithstanding the current cold weather-driven demand spike, but also in the transport sector (especially commercial vehicles and rail).

Consumption in Canada ended 2013 up by around 0.4% from a year earlier, a pace that the country has maintained for the past three years. Improvements in the US economy will benefit its northern neighbour and support higher consumption growth in 2014, along with ongoing investment in the country's energy-intensive oil sands (which require light grades to be injected) and mining more generally. With stronger US consumption, we expect North American demand to grow by an annual average of 0.6% in 2014-15.

European oil demand will continue to move downwards in 2014-15

We expect the euro zone economy to expand in 2014 by 1.1% and to accelerate to 1.4%. in 2015. Although recovery in GDP would normally boost demand, we expect structural factors in OECD Europe to weigh against consumption. Regional refining capacity has contracted, as outdated facilities are unable to compete with more efficient refineries in Asia and the European Parliament has now endorsed more stringent automotive emissions targets that will force the development of smaller, less fuel-intensive engines. We expect European oil consumption to continue to move downwards in 2014-15. Although the pace of decline will ease to an average of 0.6%, consumption will sink to levels not seen since before 1990.

Lower Japanese demand will drag down Pacific region consumption

Japan appears to be on track for a second year of declining crude oil consumption in 2014. Government data point to crude oil consumption down by 0.85% in the first two months of the year compared with the same period of 2013. We expect the pace of decline to accelerate following the introduction of a higher consumption

Our site uses cookies. By continuing to browse you are agreeing to our use of cookies.Review our cookies information page for more details.

-

5/15/2014http://www.eiu.com/index.asp?layout=displayIssuePrint&issue_id=1131755897&articl...

anegrescu

Highlight

anegrescu

Highlight

anegrescu

Highlight

tax rate in April. In addition, the use of oil for power generation will provide limited support in 2014-15, as it is increasingly likely that some level of nuclear power will return. We currently expect Japan's oil consumption to contract by 1.8% on average in 2014-15 but note that there are downside risks to this forecast. The lower Japanese consumption outlook will drag down OECD Pacific demand more generally. In addition, several major international oil companies are divesting their refining operations in Australia, which will reduce crude oil consumption there.

China's consumption has stuttered in the start of 2014

China's crude oil consumption has started 2014 at a relatively sluggish pace. In the first two months of the year, apparent demand was down by around 3.2% compared with the same period of 2013. Part of this decline can be explained by the Lunar New Year festival but stuttering industrial growth will also be sapping some momentum from consumption growth in China. However, underlying trade data suggest that some stockbuilding to build refinery stocks may be under way as imports of crude oil were up by 11.5% in the first two months of 2014, compared with a contraction of around 2% at the same time in 2013. In line with the weaker growth that we have seen at the start of the year, we have cut back our China oil consumption forecast slightly to 3.5% from 3.9% previously. We expect slightly faster growth in 2015. Reforms announced in November 2013 aim to move China's natural resources to more market-based pricing, which is likely to drive up domestic prices in the short term. At the same time, however, higher local prices could encourage refiners in China to sell more of their product to the Chinese market rather than export markets, which may neutralise the impact of higher prices to a degree.

Consumption in India could be distorted by electioneering

Oil consumption in India will probably receive an election-related boost, helping it to recover from a lacklustre year in 2013. State-run refineries have held back on raising retail prices in April despite a gradual removal of subsidies that started in 2013. A recovery in the value of the rupee will help to ease India's imported fuel burden. Given this and the opening of two new refineries set to open this year, we expect India's oil consumption to grow by 3.5% on average in 2014-15. Elsewhere in Asia, some of the larger oil consuming markets that stumbled in mid-2013 appear to be on a somewhat stronger economic footing in 2014, supporting our forecast of regional (including China) average growth of 3.5% in 2014-15.

Subsidised prices will support growth in Middle East oil consumption

Consumption in the Middle East in 2013 expanded by 2.2% as regional unrest and slower regional economic growth, particularly in Iran, a large consumer, curbed demand. Despite political and security risks, the persistence of extensive retail fuel subsidies across the region, as well as expansionary fiscal policies (albeit on a smaller scale than in recent years) in the Gulf Co-operation Council countries, will support regional consumption growth at an average annual rate of over 3% in 2014-15. Saudi Arabia's consumption will be boosted by the Jubail oil refinery, with an estimated crude draw of 400,000 barrels/day (b/d), which came on line in September 2013. Another, export-oriented refinery, Yanbu, is scheduled to become operational in September 2014. Offsetting the additional crude demand from refineries in 2014-15 will be lower crude oil burn for power generation as new domestic gas supplies come on stream; however, the latest reports suggest some delay to the gas projects.

Russia's consumption now expected to contract as economy suffers

We have become more negative on the prospects for Russia's economy in 2014 as a result of the political tension caused by the crisis in Ukraine. Consequently, we have cut our forecast for oil consumption to a small contraction of around 1%. Oil consumption is already quite saturated in Russia owing to controlled prices, and the outlook was already weighed against greater consumption as the country tries to use more domestic coal in power generation and reduce its reliance on power from oil and gas, thus freeing up the more expensive hydrocarbons for export. We expect a slight recovery in 2015 provided that the weak economic conditions are overcome.

Oil: consumption(m b/d unless otherwise indicated)

2011 2012 2013 2014 2015North America 23.96 23.62 24.00 24.17 24.29Europe 14.28 13.77 13.65 13.57 13.50Pacific 8.23 8.58 8.40 8.33 8.29Total OECD 46.47 45.97 46.05 46.07 46.08CIS 4.39 4.49 4.63 4.61 4.70China 9.32 9.82 10.10 10.49 10.89Other Asia 11.03 11.32 11.58 11.93 12.34Latin America 6.17 6.40 6.62 6.84 7.08Middle East 7.43 7.72 7.89 8.13 8.40Africa 3.49 3.66 3.79 3.95 4.13Non-OECD Europe 0.66 0.67 0.68 0.68 0.69Total non-OECD 42.49 44.08 45.29 46.64 48.23Overall total 88.96 90.05 91.34 92.71 94.31 % change, year on year 0.7 1.2 1.4 1.5 1.7Sources: International Energy Agency (IEA); The Economist Intelligence Unit.

Download the numbers in Excel

Growing incomes across the African continent will sustain a robust level of annual average consumption growth, averaging about 4.4%, in 2014-15. Regional consumption growth would be stronger were it not for weak economic growth in Egypt (Egypt accounted for nearly 20% of Africa's consumption in 2013).

-


Brazil's oil consumption was relatively soft in 2013, growing by 3.8%, as the economy struggled. Given a muted growth outlook, we expect similar growth rates in 2014-15. Elsewhere in Latin America, we expect oil consumption growth to average 3.1% in 2014-15.

Supply

The Economist Intelligence Unit expects global oil production to expand by 2.8% on average in 2014-15, slightly faster than our previous forecast, as we now forecast higher output from the US, where rapid increases in production from tight oil is transforming global oil markets. Strong output from Iraq will sustain increases in OPEC production and the risks to production from Saudi Arabia are on the upside. We have grown more pessimistic on Russian oil output this year, as political tensions are affecting the economy and demand, but we do not expect sanctions to be placed on Russian oil exports at present. Political risk remains a drag on our forecasts and we assume a certain level of disruption to supply in countries such as Nigeria and other smaller OPEC members.

Saudi Arabia has a strong start to 2014

Saudi Arabia's oil output has been running ahead of its performance in 2013. In January-February this year production averaged 9.8m b/d compared with an average of 9.66m b/d for 2013 as a whole. We are expecting some disruption in output as Saudi Aramco, the state-owned oil company, expands production at the Shaybah oilfield, which will add 250,000 b/d of output, bringing the field's total to 1m b/d. Towards the end of 2015 and into 2016 additional investment in the Wafra oilfield in the neutral zone, shared jointly with Kuwait, will add another 80,000 b/d of production. The offshore Manifa field came on stream ahead of schedule in April 2013 and output is expected to reach full capacity of 900,000 b/d by end-2014. Considering the strong start to the year, the risks to our Saudi Arabia forecast are to the upside, but for the time being we main-tain our forecast for oil production of 9.6m b/d in 2014 and 9.8m b/d in 2015.

Iraq on track for post-2003 record output

Iraq's oil production has also had a strong start to 2014. Production in February rose to 3.62m b/d according to International Energy Agency (IEA) statistics as improving export infrastructure in the country's southern ports helped to ease bottlenecks. We forecast a sizeable increase in Iraqi production in 2014-15 and, if political insecurity can be managed, the risks are to the upside. The supergiant West Qurna-2 field, operated by Lukoil, started production at the end of March and is expected to add 400,000 b/d by the end of 2014. Iraq's government is aiming to meet an export target of 3.4m b/d, which we believe will be missed by only a narrow margin. Parliamentary elections will take place in April and any delay in forming a government could exacerbate disruptions to project approvals. Persistent security risks and the stand-off between the central government in Baghdad and the Kurdistan Regional Government also create some downside risks for Iraq's oil potential. The absence of a federal hydrocarbons law will mean that disputes threatening Iraq's supply additions will continue in 2014-15.

New contracts will encourage foreign investment in Iran's oil sector

In 2013 Iran's oil production fell to its lowest level (2.68m b/d) since the end of the 1980-88 Iran-Iraq war. Despite the implementation of an interim six-month deal between Iran and the P5+1 (the permanent members of the UN Security Council plus Germany), there is little scope in the short term for a significant rebound in Iranian oil production while punitive sanctions on the central bank remain in place. However, the interim deal eases some of the issues surrounding trading Iranian oil (such as allowing EU-based firms to provide tanker insurance), meaning that further large drop-offs in production are unlikely. Indeed, Iranian exports rose in January as Japan, China and India made heavy purchases. Iran's government has also outlined new contracts for firms prepared to invest in the energy sector that would replace the disliked "buyback" service contract. The new contracts fall short of a production-sharing agreement but would allow international firms to be "paid" with a share of output. Following a change of government we believe that the political risks surrounding Iran's nuclear programme, and the threat of conflict, are receding; were a comprehensive deal to be reached in 2014-15, Iran's oil production would probably recover strongly and could even be expanded if foreign firms invest in the country. However, until that occurs we will maintain our forecast of oil production staying relatively stable at over 2.7m b/d in 2014-15.

OPEC production(m b/d)

2011 2012 2013 2014 2015Algeria 1.18 1.17 1.15 1.21 1.22Angola 1.66 1.76 1.72 1.85 2.01Ecuador 0.50 0.50 0.51 0.54 0.55Iran 3.62 3.00 2.68 2.72 2.75Iraq 2.67 2.95 3.08 3.25 3.57Kuwait 2.54 2.74 2.81 2.84 2.94Libya 0.46 1.39 0.90 0.70 1.05Nigeria 2.18 2.10 1.95 2.03 2.07Qatar 0.74 0.74 0.73 0.73 0.73Saudi Arabia 9.34 9.78 9.66 9.60 9.80Venezuela 2.50 2.50 2.50 2.47 2.46UAE 2.51 2.66 2.76 2.80 2.87Total crude 29.89 31.30 30.45 30.72 31.92NGL 5.78 6.28 6.40 6.59 6.72Total OPEC 35.67 37.58 36.85 37.32 38.65 % change 3.1 5.4 -1.9 1.3 3.8Source: OPEC.

-



Political risk and sabotage remain burdens elsewhere in OPEC

Production in Libya could see some recovery in 2014 after an agreement was reached between the central government and rebels controlling major oil ports to allow up to 180,000 b/d out of the country. Libyan production has collapsed in recent months and fell to 360,000 b/d in February, a fraction of its pre-civil war output. A full restoration of output appears unlikely in the near term; we expect an improvement by 2015, albeit at rates far below Libya's historic production levels.

It is by no means clear that output from the region will recover markedly in 2014. Nigeria is set to bring on new offshore capacity that should enable some incremental increase in output, but problems with theft and sabotage look likely to persist, particularly as the country is now entering the run-up to the next election, in 2015 (a time when local activists typically try to raise their profile, often via sabotage attacks).

OPEC output to show relatively limited growth in 2014

OPEC member state delegates agreed at their latest meeting, in December 2013, to leave the production target of 30m b/d unchanged. The production group is growing increasingly aware of the role that unconventional oil output is having on global supplies and said that it would swiftly adjust levels to respond to changes in supply or demand. However, the outlook for OPEC production in 2014 is soft, with output growth of 1.3% tentatively expected, although the risks are to the upside considering strong performance from Saudi Arabia and Iraq. A return to more normal production levels in Libya and additional capacity from Iraq will help to drive OPEC's output in 2015 to a growth rate of 3.8%.

US oil output revised up this month

US oil production (including natural gas liquids) will expand significantly again in 2014 owing to ongoing increases in production from tight oil producing regions. Already in 2014, crude production has moved up above 11m b/d when including natural gas liquids in line with the definition of production used by the IEA. As a result, we have nudged up our forecast for US oil output this year to 11.2m b/d (from 11.1m b/d previously) and note that risks are to the upside. Production will expand further in 2015, to almost 12m b/d, as investments in the Permian Bain in Texas start to bear fruit.

The US's reliance on imports of petroleum has fallen significantly since increased production from shale regions has taken off. Imports as a share of petroleum product consumption have fallen consistently since 2008. In 2013 they provided slightly less than 52% on average, but this figure had fallen below 50% by the end of the year and into January 2014. The US government has projected that imports could fall to zero by the 2030s in its high oil and gas resource projection. A more immediate debate is whether the US will transform itself into a net oil exporter and begin to allow some crude exports to countries aside from Canada. The political risk surrounding oil output from the Middle East and former Soviet Union has moved the geopolitical significance of US oil exports up the public agenda, with some politicians actively seeking to allow exports of crude. However, we remain of the view that as long as concerns about the sustainability of the economic recovery in the US persist, policymakers would be unwilling to introduce policies that could potentially lead to domestic prices rising.

Ukraine crisis is unlikely to affect Russian supply

Russia's production fell slightly in the first quarter of 2014 as cold weather led to power disruptions and interrupted drilling. Russia's potential to add production is significant, with Eastern Siberia and Sakhalin Island still at relatively early stages of development. The country's energy strategy sees the share of eastern regions in total production rising from 3% in 2008 to nearly 20% by 2030. Export infrastructure, notably pipelines, has also improved, opening up markets in Asia (traditionally, oil exports were almost exclusively to western or other Commonwealth of Independent States—CIS—markets). There is also the possibility of sizeable Arctic reserves; Gazprom has begun operations at Russia's first offshore site in the region. In addition, Russia holds promising reserves of shale oil; Gazprom and Royal Dutch Shell have begun work on developing the Bazhenov shale formation in Siberia, which has significant oil reserves. The Russian annexation of Crimea in Ukraine has sparked some of the highest tensions with the West since the end of the Cold War, but at present we do not expect energy investments in Russia from international companies to be affected. Indeed, in early April Total announced that it had secured concessions for several shale blocks in Siberia, and other companies have committed to pro-jects already under development. Were tensions to escalate further, we would expect Russia to orient more of its hydrocarbons potential to Asian markets.

Kashagan, the giant oilfield in Kazakhstan, was set to bring production up to 370,000 b/d in 2014. However, gas leaks from pipelines in October 2013 led to a shutdown of the field, with safety testing carrying on into February. It is unclear when the field will resume operations and as a result we note some downside risks to our forecasts of Kazakhstan's oil production However, we still forecast that the new capacity will enable Kazakhstan's overall output to reach 1.91m b/d in 2015, up from just 1.62m b/d in 2011.

Infrastructure debates will linger over Canada's oil potential

Canada's oil production rose by nearly 6%, according to the latest estimates from the IEA, and we expect sustained growth of around 3.3% on average in 2014-15. However, Canada's oil industry is facing a number of challenges. In particular, infrastructure—especially pipeline—constraints are making it difficult to market Canadian oil. An increasing amount of Canadian oil is now being transported by rail; although expensive, rail

-


transport is faster and more flexible and has opened up new markets, both in the US and Canada. The US State Department has concluded that the Keystone XL pipeline linking production centres in Alberta to the US Gulf Coast would not add to global climate change. A decision on whether to approve the pipeline now rests with the US president, Barack Obama. If approved, Keystone XL would help to release large volumes of Canadian crude to global markets, and encourage continued investment and higher production. However, we do not expect a decision on the pipeline to be made until after the US's primary elections in November 2014. Another medium-term risk to Canada's oil output is the prospect of increased oil output from Mexico if the opening-up of that country's hydrocarbons sector prompts greater interest from foreign firms, helping to expand output.

Oil: production(m b/d unless otherwise indicated)

2011 2012 2013 2014 2015OPEC crude 29.89 31.30 30.45 30.72 32.02OPEC NGLs 5.78 6.28 6.40 6.59 6.72Total OPEC 35.67 37.58 36.85 37.32 38.75 % change, year on year 3.1 5.4 -1.9 1.3 3.8OECD 18.9 19.9 20.9 22.0 22.5Latin America 4.2 4.2 4.2 4.5 4.7Asia 7.7 7.8 7.7 7.9 7.9Africa 2.6 2.3 2.3 2.6 2.6Others 17.2 17.1 17.4 17.6 17.9Total non-OPEC 50.6 51.2 52.5 54.5 55.7 % change, year on year 0.1 1.1 2.6 3.7 2.3Processing gains 2.1 2.1 2.2 2.2 2.2Overall total 88.4 90.9 91.5 94.0 96.7 % change, year on year 1.3 2.8 0.7 2.7 2.9Sources: IEA; The Economist Intelligence Unit.


Norway looks north to improve production

Output in the North Sea (the UK and Norway) slipped in 2013 owing to rapidly declining output at mature fields and insufficient new fields to compensate. New fields coming on stream also tend to be smaller than older ones. Norway's output is expected to pick up slightly in 2014 as a number of new fields come on stream. Production in Norway will move further north into the Arctic as firms are attracted by the stable regulatory environment. However, the combination of rising costs and stable oil prices may dampen investment enthusiasm. In the UK, output is estimated to have fallen by around 8.5% in 2013. The UK is set for significant additional exploration in 2014, when the government will auction large tracts of the country. Much of the focus will be on natural gas exploration, but some tight oil resources may be uncovered as well.

Stocks and prices

We expect the global oil market to loosen somewhat in 2014 as increased oil output from the US, Iraq, Saudi Arabia and Canada add substantial volume to global production. A slightly softer outlook for demand in several large emerging economies (China and Russia) has also contributed to our larger market surplus. The global market will record a larger surplus in 2015 as US production continues to displace imports and output further expands in Iraq. OECD stocks have been drawn down in early 2014 as cold weather in the US led to increased demand for heating fuel products. Improving pipeline infrastructure will also contribute to a drawdown in US stocks in 2014, which will bring down aggregate OECD levels. Elsewhere, we expect that there is some stockbuilding being undertaken in China.

Oil: supply and demand(m b/d unless otherwise indicated)

2011 2012 2013 2014 2015Productiona 88.41 90.91 91.54 94.00 96.72Consumption 88.96 90.05 91.34 92.71 94.31Balance -0.55 0.86 0.20 1.29 2.40Stocksb 2,605 2,664 2,564 2,508 2,720Stocks to consumption ratioc 7.99 8.26 7.93 7.75 8.41a Including processing gains. b Total OECD stocks. c Number of weeks' OECD consumption on hand.Sources: IEA; The Economist Intelligence Unit.


Prices balancing political risk and economic performance

Oil prices (dated Brent blend) hit an average of US$107.88/barrel in the first quarter of 2014, slightly above our forecast of US$107.5/b. Markets have not been substantially affected by the crisis in Ukraine, as sagging demand in Europe and concerns over the sustainability of China's demand growth acted as a counterweight to political risk. We maintain our forecast of prices sliding again in 2014 as oil supply remains ample. The de-escalation of political risks in Libya is also contributing to softer sentiment in the seasonally weaker second quarter. An ever-present risk to our price forecast is an escalation of geopolitical tensions, especially in the Middle East and North Africa. Prices will remain above US$100/b in 2014-15 in part to reflect higher costs of production for oil and also as we expect major OPEC producers to monitor output to match the levels they need to allow for substantial public investment programmes.

The spread between US benchmark West Texas Intermediate oil and dated Brent Blend will tighten in 2014 as improved network infrastructure in the US allows oil to flow out from the Cushing Oklahoma trading point to

-


© 2014 The Economist Intelligence Unit Limited. All rights reserved. About us | Privacy statement | Terms of access | Cookies | Contact us

markets on the Gulf coast. WTI will edge up further in 2015, keeping the gap between the two benchmark grades narrow.

Oil: prices(US$/b unless otherwise indicated)

2012 2013 2014 2015 2016Brenta

1 Qtr 118.60 112.91 107.88 106.00 108.002 Qtr 108.86 103.01 106.50 105.00 105.003 Qtr 109.95 110.10 102.00 108.00 -4 Qtr 110.45 109.41 106.00 110.00 -Year 111.97 108.86 105.59 107.25 - % change 0.9 -2.8 -3.0 1.6 -WTIa

1 Qtr 102.88 94.32 98.72 104.94 106.922 Qtr 93.44 94.19 99.05 103.95 103.953 Qtr 92.17 105.83 96.90 106.92 -4 Qtr 88.14 97.43 102.82 108.90 -Year 94.16 97.94 99.37 106.18 - % change -0.9 4.0 1.5 6.8 -OPEC reference basket1 Qtr 117.40 109.49 104.75 102.24 104.182 Qtr 101.35 100.91 102.86 101.30 101.293 Qtr 106.80 106.90 98.36 104.17 -4 Qtr 107.29 106.44 102.25 106.11 -Year 108.21 105.94 102.05 103.46 - % change 0.7 -2.1 -3.7 1.4 -a Spot price (US$/lb).Sources: Haver Analytics; The Economist Intelligence Unit.


-


Crude Oil

Documents

Transcript of Crude Oil