MARKETMATTERS
Various Factors
Affect Outlook For Oil
Price In 2014
What can one expect energy markets to be like in 2014? Petroleum is in the throes of profound change that is presenting as shifts
in traditional geographic alliances and changes in supply sources,
distribution patterns, interfuel competition and regulatory regimes.
Crude oil (West Texas Intermediate) traded in a $9.25 range
for the most part last year, ranging between $90.25 and $99.50
a barrel. Prices spiked briefly to $112.24 in August, reflecting
geopolitical unrest in Syria and other Middle East and North
African states. The year ended with near record supplies of crude
oil in the United States: more than 1 billion barrels in both commercial inventories and the Strategic Petroleum Reserve, notwithstanding a sharp drop in inventories late in the year.
Natural gas stocks were around 3.2 billion cubic feet, nearly 500
Bcf less than 2012 at the same time. Production moved higher
through 2013, but conversion to now less expensive natural gas and
cooperative weather apparently was enough to eat into storage.
What about 2014? There are some factors that almost certainly
will influence supply/demand balances this year:
· The United States will review energy security policies that
go back to the 1970s. This will include the ban on crude oil exports and the size of the SPR.
· U.S. crude production exceeded 8 million barrels a day in 2013.
Some analysts expect to add up to another 1 MMbbl/d this year.
· Shale production should cap U.S. oil prices, but foreign offsets could support prices. These include the Organization of Petroleum Exporting Countries cutting quotas and challenges to production in Iraq, Brazil and Canada. Challenges to supply remain
important in Libya, Nigeria and Iraq as well.
· Upside price pressure on Brent crude oil comes from its position as the foreign crude price marker. Its own North Sea locations
face problems because of the age of the region’s oil fields, which
require more intense maintenance.
The impetus to re-evaluate long-standing energy security policies in the United States reflects major changes in the balance of
supply and demand.
U.S. Exports of Crude Oil
“Petroleum is in the throes of
profound change.”
Domestic production has taken the place of imported crude oil
in U.S. supply balances. Net imports have plummeted from highs
above 12.0 MMbbl/d around 2005 to slightly fewer than 7.5 MMbbl/d as 2013 drew to a close.
Domestic consumption is off its 21 MMbbl/d high around 2005,
and now sits at 19 MMbbl/d. The losses in U.S. demand, however, have been offset by product exports rising to 3.6 MMbbl/d.
Two years ago, product exports were 2.8 MMbbl/d.
There has been considerable pressure to allow exports of crude
oil as U.S. self-sufficiency grows. Long lines at gasoline pumps
remain front and center in the American mind, despite having last
occurred 40 years ago. It was these lines that provided an important
impetus to hold on to U.S. oil by restricting exports and creating
the Strategic Petroleum Reserve. The SPR is home to nearly 700
million barrels of crude oil.
There is an inherent conflict between fear of oil shortages and
desires to export American crude oil. Domestic production and
more available in Canada can ease those fears and promote energy independence. In a supply-rich crude oil environment, economic logic may conduce toward allowing exports. The export
question is likely to be one of the more contentious issues of 2014,
with no obvious winner.
Looking at natural gas, working storage was 2.974 trillion cubic feet as of Dec. 27, according to Energy Information Administration estimates. Stocks were 562 Bcf less than last year at that
time and 289 Bcf below the five-year average of 3.263 Tcf.
Natural gas prices started 2013 at $3.05 an MMBtu. December futures prices terminated at $4.43. The gain reflected continuing
conversions from coal to natural gas in the industrial sector and
some help from the weather.
Bearish considerations abound for 2014. In the Northeast, new
pipeline capacity eased off-take constraints. There has been processing
capacity added to capture associated gas and more drilling activity.
Technical price charts were topping in early January. Cold
weather was important in the November-December rally, but without continued cold, prices are exposed to downward pressure. This
is consistent with Elliott Wave counts that anticipate a fourth wave
correction to $4.25 or even $4.10 before a final fifth wave rally,
which could challenge $5.00.
❒
125,000
Thousand Barrels
100,000
75,000
50,000
25,000
0
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
U.S. Exports of Crude Oil
Transactions in securities futures, commodity and index futures, and options carry a degree of risk. Past
performance may not be indicative of future results. This column is for informational purposes only. It
does not represent an investment offer, solicitation or recommendation.
ALAN H. LEVINE is chief executive officer and chairman of
Powerhouse Inc. An internationally recognized expert in energy pricing and business practices, he has more than four
decades of experience as a petroleum specialist. He can be
reached at [email protected], or 202-333-5380.
Reproduced for Powerhouse Inc. from the February 2014 issue of The American Oil & Gas Reporter