Are We Heading Down to a Double-Dip?
The commodity price violation has two sides. One side is the economics of supply-demand, and the other side few wild cards that can surprise the market over night!
You need a magic ball to forecast the oil price and guess whether we have passed the bottom or not. Quite a few investment bankers foresee a double-dip ahead of us in summer (see above graph), while others foresee an exit for 2015 as high as $85/bbl.
Let’s look at few key factors that influence oil price in next 6 month:
- Supply trend: Unconventional plays are well known for their high initial production rate (IP) and a sharp decline afterwards, about 3-6 month later. With re-fracking and higher number of stages the sharp decline of wells came on stream over Q4`14 to Q1`15 might be pushed out. This can result in a longer than expected plateau beyond Q2 for US shale plays. More worrying, there are unconfirmed intelligence that suggests as much as 300,000 b/d shale production is still not even exploited (read more).
- Consumption: There are indications of increase in consumption driven by SUV sales in US, driven by higher disposable income, etc . But on the flip side economic growth of Asian economies is slowing down.
- 2015/2016 budgeting: Right now (in Q2-2015) the investment community has clearly backed off from shale plays. Those operators with scale and financial discipline, and stronger P&L will have a better chance to survive. Investment in shale plays are cut back in Q1-2015 budget revisions, but an extended low price environment up to Dec 2015 can have a fatal impact on the play as the capital will fly away from 2016 budget.
- Hedging: Big portion of hedged volumes have a horizon of 12-18 month. Many owners will start feeling the pain of low price environment from later in 2015. Again Q3/Q4 2015 become a critical milestone.
- Storage: US feed-stock storage is at record high. Few NOCs have millions of barrels at sea (Iran storing 30 million barrels of oil at sea). All this indicate a reserve tank ready to take the heat from upraising price if there is any.
- Negative feed-back: Higher oil price will make US shale plays more viable, this will cycle back and bring more shale production to the market and dump WTI. The negative feedback if material enough can keep WTI depressed for few quarters well into 2016.
- OPEC: Group’s meeting in June 2015 can play a wild card into the equation if budget cuts are agreed. Already few of the members (Iran, Libya) complained about effectiveness of the current strategy that the consortium picked late 2014. However, in view to OPEC strategy to safeguard their market share, it would make sense for the cartel to keep the pressure on rivals (mainly US shale) until 2015 end to kill possible 2016 capital budget on the play.
- IRAN: Iran’s nuclear case will be framed in June. Next round could be detrimental in getting an agreement on how the sanctions can/shall be lifted. As such estimated 500,000 to 1,000,000 million barrels can find its way to the market over a 12-18 month time frame.
- Other players: Iraq hit 3,000,000 b/d after decades. Libya is up from 350,000 to 500,000 b/d lately, yet a third of its capacity (1.5mb/d) for the biggest oil reserve holder in Africa. These group of producers can bring in higher barrels in 12-18 month span if their social/political climate is stable. On the flip side their production can vanish in matter of days if social unrest spread the country (such as ISIS impact to Kurdistan oil export).
- Politics: Country or regional political or social unrest around any of major players such as Saudi or Russia can simply cause spikes in crude price.
With so many moving parts in play, no surprise why investment bankers oil price forecast has such a wide spread ($38-$58 /b).