20 May 2016


May 16, 2016

Where Oil Prices Go From Here; Goldman Sachs Says “Oil Market Has Ended Almost 2yrs Of Oversupply & Flipped To A Deficit’

Pulitzer Prize-winning author, and Vice Chairman of the global consulting firm IHS, has an Op-Ed in this morning’s (May 16, 2016) Wall Street Journal on what the future holds for the price of oil. Mr. Yergin, who is steeped in the history of oil, begins by noting that “leaders of the major oil exporting countries used to talk about “saving the oil” for their grandchildren. But now,” he writes, “the grandchildren are in charge and the want to monetize the oil. That is certainly so in Saudi Arabia, where Deputy Crown Prince Mohammed bin Salman — a grandson of the country’s founder, Abdul Aziz ibn Saud — has launched an ambitious plan to reduce the country’s dependence on oil. Decrees issued this month announced far-reaching changes in Saudi ministers and government organizations.”

“Yet,” Mr. Yergin observes, “the result could end up making Saudi Arabia, which now produces one of every eight barrels of the world’s crude, an even bigger player in the global oil market. Prince Mohammed’s Vision 2030 plan comes as the oil market is working back toward a balance, having crashed as low as $26 a barrel in February — from $100 in 2014. Current prices in the mid-to-high $40s are signaling a turn in the market,” he contends.

“World oil production still exceeds consumption. Yet by Autumn,” Mr. Yergin writes, “declining production and rising demand should put the market roughly in balance, with prices around $50 a barrel, although still with a big overhang in oil inventories.”

“The effect of the oil-price collapse over the past two years can be seen in the postponement, delay, or cancellation of multi billion-dollar exploration and production projects around the world. The latest report from my company, IHS,” he writes, “notes that 2015 marked the lowest level of new conventional oil discoveries since 1952.” Couple this decline with the shuttering of much of the shale oil producers, and you get a decline in U.S. oil production output. Sometime later this year, Mr. Yergin forecasts a U.S. oil production decline in excess of 1M barrels of oil per day — from the 9.7M peak last month (April 2015).”

“Yet, by 2020, world oil consumption could be 5.7M barrels a day higher than this year’s 95.6M. So, prices will have to rebound, to provide the signal for new investment.” While Mr. Yergin says that U.S. shale production “will play an important role,” he expects “a big part of the new demand is likely to be met by Saudi Arabia and other Gulf countries.”

Coincidentally or not, Goldman Sachs put out a note this morning saying “supply disruptions around the world (Nigeria, Canada, etc.) of as much as 3.75M barrels per day have wiped out the [oil] glut that pulled down prices by as much as 70 percent between 2014 and 2016. The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected,” Goldman said. Goldman noted however that, “the market would flip back into surplus in in the first half of 2017 — as it said prices around $50 per barrel in the second half of 2016 would see exploration and production activity picking up.”

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