Analysts are predicting an end to the plummeting oil cycle. Most percieve that the current oil bust is no different to the previous oil price cycles. looking back in history, the last six major oil prices lasted for about 2 years. Considering that it is now approaching 2 years since the current oil plummeting cycle began (july 2014), an end might be in sight spurring a new hope within the oil industry.
According to whats happening in the market, demand and supply are begginning to balance out due to producers and consumers responding to price changes.
Although it is difficult to select an exact date when the low oil prices will end, it is expected to be much sooner .
According to the International Energy Agency (IEA) oil market report released on 14th June 2016, the forecast for oil demand is expected to increase by 1,270,000 barrels per day from the 2nd quarter to the 3rd quarter. Generally demand always spikes in the 3rd quarter.
The reasons supporting this prediction include;
• Reduction in global oil production – Global oil production in May was 590,000 barrels per day less than it was a year ago.
• instability in Nigeria – Nigeria’s oil sector is under attack and the situation seems to be getting worse(insert link for news on attacks in oil fields in Nigeria)
•Drop in overall OPEC oil production – OPEC production fell by 110,000 barrels per day as increases in Iranian production were more than offset by big losses in Nigeria, Libya and Venezuela
• Increased global oil demand – Global demand is up 1,600,000 barrels per day year-over-year as Chinese demand has held up and demand from India is very strong.
The recent canadian wildfires withdrew 1,500,000 barrels per day off the oil market at their peak, contributing to a drop in oil supply from Canada, although production is expected to be restored within Q3.
The situations in the major OPEC nations of Nigeria, Libya and Venezuela are now considered much worse than earlier perceived. There is increasing concern that Venezuela’s government may collapse due to the debt load created by low oil prices.
The current steady growth in oil demand now provides a clearer direction for the oil markets. Some analysts predict that demand will exceed production in the next 9 months. In as much as the high storage may cushion supply for a time, the increased demand will drive oil prices higher, although the anticipated brexit from the EU might water down the expectation.
A snippet of what some analysts are prediction include;
• West Texas Intermediate (WTI) will average $60/bbl in the 3rd quarter and $75/bbl in 2017 – Raymond James
• Morgan Stanley has recently raised their long-term oil price for Brent crude by $10/bbl to $80/bbl
Infact it is thought that “$70 would be the new $100” meaning that improving well results and much lower drilling & completion costs of horizontal wells in the U.S. shale plays makes the economics for new wells about the same at $70 oil as they were a couple of years ago at $100 oil.
The increasing oil prices would spur demand for frack sand in the US which is predicted to double within the next 12 months as most upstream companies use alot more sand to complete horizontal wells in the US.
With the WTI having risen above $50 a barrel ( briefly last week), some North American LTO developers are putting rigs, service equipment and personnel back to work. This is a catch 22 situation because this decision could return the oil market back to the oil crisis situation or result in a cap in prices.
The current cycle has devastated many oilfield services firms, it is expected that drilling & completion activities will take longer to ramp up as the first order of business will be to offset debt as cashflow increases with increasing oil prices. The US is recording steadily decreasing rig counts which since 2014 have acted as a driver in the oil prices, contributing to US status as a ‘swing producer’ .
Given that it was the 4 million barrels per day (bbl/d) increase in North America’s light tight oil (LTO) production fuelled by the $100 per barrel crude oil prices that contributed largely to the collapse of oil prices in 2014 oil price analysts fear that this could go either way.
Thus if the price of oil is now high enough to make light tight oil (LTO) production economic once again some analysts are of the belief that the reward would either be a cap on further price increases or the foundation of the next collapse.
As for those investing in the oil markets, alot of volatility is expected in the energy sector for the mean time.