Investment Research — General Market Conditions
18 December 2014
Research Global
Oil price to bottom when non-OPEC output rise halts – déjà vu #2

We expect the current slide in oil prices to continue until we see producers
starting to adjust to the lower prices by lowering output around mid next year.

Based on the difference in crude oil prices and production costs, producers of
unconventional oil in, for example, the US, Canada and Brazil look more
vulnerable.

We see some probability of a cut in OPEC’s output target in June.

Pricing in the forward market and the experience of the 1986 oil glut indicates
that the price of Brent crude oil will recover to USD85/bl in the medium term.

We have revised down our oil-price forecasts. We now expect the price of Brent
crude oil to bottom in Q1 next year at around USD58/bl (revised down from
USD87/bl) and average USD67/bl in 2015 and USD85/bl in 2016 respectively
(revised down from USD93/bl and USD99/bl).
The lesson from the 1986 oil glut
As we wrote in Research Commodities: The oil price plunge in perspective – déjà vu #1,
12 December 2014, the current plunge in oil prices is reminiscent of the collapse in oil
prices in 1985 and 1986. In November 1985, oil prices started a sharp downturn, when
OPEC, led by Saudi Arabia, initiated a price war to regain a larger share of the global oil
market by flooding the market.
The 1986 oil glut déjà vu
This is the second paper in our
series of papers under the title
’1986 oil glut déjà vu’ – see also:
Research Commodities: The oil
price plunge in perspective – déjà
vu #1, 12 December 2014
Danske Bank’s oil price forecasts
Crude oil front month (US$/bbl)
NYMEX WTI
ICE Brent
Oil products:
front month (US$/t)
NYMEX gasoline Euro-bob Oxy
Jet fuel CIF cargo
ULSD 10ppm CIF NWE cargo
0.1% Gasoil Barges FOB Rotterdam
ICE Brent
1.0% fuel oil FOB NWE cargo
3.5% fuel oil FOB ARA barge (RHS)
2014
93
100
2015
63
67
2016
81
85
916
907
855
843
731
555
528
669
669
609
604
491
341
331
804
804
744
739
619
452
442
Source: Macrobond Financial and Danske Bank
Markets
The OPEC-led price war came to a halt three to four months later when the oil price had
reached a level that led to the beginning of a decline in OECD oil production, most
notably in the US. It marked the peak in OECD oil production and further started a
gradual recovery in oil prices.
In 1986 the oil price bottomed when OECD production peaked
Source: Macrobond Financial
Important disclosures and certifications are contained from page 5 of this report.
Senior Analyst
Jens Nærvig Pedersen
+45 4512 8061
[email protected]
www.danskeresearch.com
Research Global
Who will be first to break?
As OPEC continues to aggressively talk down oil prices, highlighted by recent comments
from UAE energy minister, Suhail Al-Mazrouei that OPEC will not change its 27
November decision to keep its collective output target at 30mb/d even if prices drop as
low as USD40/bl, the question is, which major oil producing country could be the first to
lose in the 2014 oil glut?
The answer to this question depends on the price of the country’s crude oil and on the
level of its production costs. Crude oil is found in different qualities around the world,
which is reflected in the price the individual producer can get. Canadian and LatinAmerican crude oil tend to be of a lower quality and are thus priced lower relative to
crude oil from the US, the Middle East, Africa and Europe.
Rising production in Americas
Producers in Africa and the Middle East are generally viewed as having the lowest
production costs, while producers of so-called unconventional oil, e.g. producers of light
tight oil in the US, Canadian producers of oil from tar sand and Brazilian producers of oil
from ultra-deepwater drilling, probably have the highest production costs. The latter have
been successful in increasing production in recent years.
This suggests that OPEC producers, viewed from the perspective of profitability, are best
equipped to endure a price war, while producers of unconventional oil in, for example the
US, Canada and Brazil, may be first in line to scale back in production and investment. In
particular, producers in Canada of oil from tar sand look vulnerable.
Source: Macrobond Financial and Danske Bank
Markets
Cheap oil – Canada first to lose in the price war?
70
USD/bbl
Crude oil price benchmarks
60
50
40
30
20
10
0
12/12/2014
Source: Macrobond Financial and Danske Bank Markets
USD85/bl the medium-term anchor for crude oil prices
Stable long end of forward curve
Drawing on the experience from the 1986 oil glut, crude oil prices may be heading lower
over the next couple of months before significant adjustments on the supply side of the
market start to take place. At that point though, which would be sometime during the first
half of 2015, we expect prices to start gradually recovering.
History further suggests that it might not be a particularly strong recovery in prices. In
1987, the price of Brent crude oil returned to around 70% of the level it had before the
collapse. Hence, if prices follows the same pattern, the price of Brent crude oil should
recover to around USD75/bl. The price fall has not reached a similar depth to 1986, so the
anchor for an eventual recovery in prices may be higher than this level.
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18 December 2014
Source: Macrobond Financial
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The three-year and four-year generic point on the Brent crude oil forward curve has been
quite stable around a level of USD90/bl over the period since 2010. It overshot this level
during the Arab spring in 2011 and is currently undershooting it, which may be indicative
of the medium-term anchor.
Based on this analysis we view USD85/bl to be the medium-term anchor for an eventual
recovery in the price of Brent crude oil. It is roughly USD20/bl lower than the average
level over the past couple of years and probably low enough for OPEC to succeed in its
agenda to slow the pace of expansion in non-OPEC oil production.
Oil prices to start recovering in Q2 next year
Our previous oil-price forecasts did not take into account the significant market reaction
to the decision from OPEC to keep its output target unchanged – the price of Brent crude
oil has dropped around USD20/bl over the three weeks since we published them
Commodity Forecast Update: Recovery in 2015, stabilising in 2016, 24 November 2014.
Our forecasts are above prices in the
forward market
Consequently, we have revised our short-term forecast lower. We see a risk that oil prices
could fall further in the near term before reaching the bottom in Q1 next year. We expect
a recovery to begin in Q2 supported by higher demand for oil on the back of stronger
global economic growth and the start of adjustments on the supply side. First we are
looking for a slowdown of the expansion in non-OPEC oil production, but we also see
some probability of OPEC cutting its output target at the June meeting. A prerequisite for
OPEC to cut its target would be a prior reaction in non-OPEC production.
We expect the price of Brent crude oil to average USD58/bl in Q1 next year (revised
down from USD87/bl), USD62/bl in Q2 2015 (revised down from USD91/bl), USD70/bl
in Q3 2015 (revised down from USD95/bl) and USD78/bl in Q4 2015 revised down from
USD97/bl). For the whole of 2015 we expect the price of Brent crude to average
USD67/bl (revised down from USD93/bl). In 2016 we expect prices to recover further to
an average level of USD85/bl (revised down from USD99/bl).
Source: Macrobond Financial and Danske Bank
Markets estimates
We expect prices of oil products to track this path and thus see the price of Jet Fuel
averaging USD669/MT in 2015 (revised down from USD869/MT) and USD804/MT in
2016 (revised down from USD924/MT), the price of ULSD to average USD609/MT in
2015 (revised down from USD812/MT) and USD744/MT in 2016 (revised down from
USD864/MT), the price of 0.1% Gasoil to average USD604/MT in 2015 (revised down
from USD804/MT) and USD739/MT in 2016 (revised down from USD854/MT) and the
price of 3.5% fuel oil to average USD331/MT in 2015 (revised down from USD492/MT)
and USD442/MT (revised down from USD492/MT) and USD442/MT in 2016 (revised
down from USD529/MT).
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Danske Bank’s oil-price forecasts
2014
2015
2016
AVERAGE
18/12/14
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
2013
2014
2015
2016
56
61
99
108
103
110
97
103
74
78
54
58
58
62
66
70
74
78
78
82
80
84
82
86
82
86
98
109
93
100
63
67
81
85
Oil products:
front month (US$/t)
NYMEX gasoline Euro-bob Oxy (USD/MT)
Jet fuel CIF cargo (USD/MT)
ULSD 10ppm CIF NWE cargo (USD/MT)
0.1% Gasoil Barges FOB Rotterdam (USD/MT)
ICE Brent (USD/MT)
1.0% fuel oil FOB NWE cargo
3.5% fuel oil FOB ARA barge (RHS)
563
626
567
555
449
294
304
941
973
926
910
790
609
574
1,006
969
922
909
805
624
579
964
935
881
865
757
574
557
752
752
692
687
572
412
402
600
600
540
535
425
285
275
629
629
569
564
454
309
299
693
693
633
628
513
358
348
752
752
692
687
572
412
402
786
786
726
721
601
436
426
801
801
741
736
616
451
441
815
815
755
750
630
460
450
815
815
755
750
630
460
450
977
988
939
919
797
615
591
916
907
855
843
731
555
528
669
669
609
604
491
341
331
804
804
744
739
619
452
442
Crack spread:
front month (US$/t)
NYMEX gasoline Euro-bob Oxy (USD/MT)
Jet fuel CIF cargo (USD/MT)
ULSD 10ppm CIF NWE cargo (USD/MT)
0.1% Gasoil Barges FOB Rotterdam (USD/MT)
1.0% fuel oil FOB NWE cargo
3.5% fuel oil FOB ARA barge (RHS)
114
177
118
106
-155
-145
151
183
135
120
-182
-217
201
164
117
104
-181
-226
206
178
123
107
-183
-201
180
180
120
115
-160
-170
175
175
115
110
-140
-150
175
175
115
110
-145
-155
180
180
120
115
-155
-165
180
180
120
115
-160
-170
185
185
125
120
-165
-175
185
185
125
120
-165
-175
185
185
125
120
-170
-180
185
185
125
120
-170
-180
180
190
142
122
-182
-206
185
176
124
112
-176
-203
178
178
118
113
-150
-160
185
185
125
120
-168
-178
Energy:
front month (US$/bbl)
NYMEX WTI
ICE Brent
Source: Macrobond Financial and Danske Bank Markets estimates
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Disclosure
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske
Bank’). The author of this research report is Jens Nærvig Pedersen, Senior Analyst.
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