Delphi’s Sætre asks if oil price trend can continue
Håkon Sætre, manager Norwegian Equities and Delphi Norge, has looked at whether the current oil price trend can continue, and what this means for investors in the country.
The high oil price is enabling oil companies and the oil-service sector to show their muscles. The trend indicates that the oil price will continue to rise, but some people believe that the increase in supply from new oil resources will spoil the party. Who are we to believe?
Like all other prices in a free market, the oil price is controlled by supply and demand. By gathering information on these two factors, a future price path can be predicted. This sounds easy and simple, but in practice most oil experts are wrong far more often than they are right in their predictions.
The art of modelling
The demand side is probably the easiest to have an opinion on. Here, several trends that are expected to last for a certain amount of time can be relied on. Among other things, there seems to be agreement that most of the increase in oil consumption will take place in emerging economies. At the same time, it appears likely that the OECD countries in particular will make their petrol consumption more efficient and that especially the USA has a lot to gain here. It also seems likely that there will be greater demand for cleaner energy forms. Nonetheless, it is very difficult to predict how strongly these trends will affect the overall demand picture. In the slightly shorter term, the demand will naturally depend most of all on economic growth, both within and outside the OECD.
On the supply side, the fall-off rates of hundreds of mature oil fields is one of the most complicated issues to estimate. Apart from different geological factors, the fall-off rate is affected by factors such as technological developments, tax incentives and the willingness to invest. In addition, it is affected by assumptions relating to new finds, how new technology and available capacity will affect developments and, not least, the future cost of developing new finds. There is also a great deal of uncertainty regarding the more closed regimes’ opportunities for production growth and regarding the political risk in several oil-producing countries. It is not meant to be simple!
Since the stock markets bottomed out in 2003, the main oil trend has been higher demand for oil combined with falling production outside OPEC countries. This disparity contributed to a sharp rise in the oil price until the autumn of 2008. The more the oil price increased and the global production reserves shrank, the more people there were who argued that we were close to the production peak – the so-called peak oil. When the financial crisis erupted in the autumn of 2008, there followed a dramatic period of lower demand for oil and a sharp decline in the oil price. In a six-month period, the oil price (Brent) fell from almost $150 a barrel to just under $40. At the same time, the talk of peak oil stopped. However, it did not take long for both the consumption rates and price to rise quickly again. As early as in 2010, global oil consumption was at a record-high, greatly helped by emerging economies – with Chinese stimulus packages at the forefront. However, the peak oil talk has not resumed. Now the focus is on US shale gas and shale oil.
Shale shift in the USA
From being traded at just over $10 per MMBTU (the measurement unit for gas) in 2008, the price of gas in the USA has fallen steadily and at the time of writing is traded at less than $3 per MMBTU. The price fall is a result of the increased production of shale gas. Shale gas represents a major shift in US energy policy and is predicted to ensure that the USA has cheap gas for several decades to come. If the USA manages to convert a sufficiently large share of its transport sector to gas, its dependency on oil can be expected to decline significantly.
Over the past few years, the techniques used to produce shale gas have also been used to produce shale oil. As a result, the USA’s oil production has risen sharply in a short space of time, after declining for more than 20 years. In light of recent developments, some experts believe that the USA may be self-sufficient in oil within a decade. If true, this will have major economic consequences. Here at Delphi, we believe that a self-sufficient USA necessitates major changes to the supply and demand sides, and that it is too early to say whether or not we are facing a robust, long-lasting trend.
PIRA, a US analysis agency, estimates that just over one million barrels of shale oil will be produced per day in 2012, which is twice that produced in 2011. The USA’s total oil production is expected to be 8.5 million barrels a day in 2012. At the same time, the country’s need for imports will continue to be around nine million barrels a day. In comparison, it can be mentioned that the world’s largest oil find in 2011, the much publicised Johan Sverdrup field in the North Sea, will hopefully manage to produce 500,000 barrels a day. In addition, it can be mentioned that the global oil consumption is around 90 million barrels a day, and that less than two million barrels of this comes from the Norwegian continental shelf.