Market Overview: Looking forward on oil prices in 2015

By Eithne Treanor

The oil market closed the year below US$60 a barrel, a far cry from its midyear peak and almost half it’s trading price this time last year. It’s been five years since we last saw the average oil price below US$100 a barrel.

According to Neil Atkinson, head of analysis at Lloyd’s List Intelligence, Brent crude prices averaged US$99.51 a barrel, with WTI at US$93.04 a barrel for 2014. So whats in store for 2015 as the market looks ahead as producers and the wider industry will hope for better demand and stronger prices in 2015.

OPEC is ready to sit this one out and talk of any emergency meeting before June is being ignored by the wealthier Middle East players, especially Saudi Arabia.

While OPEC has committed to getting its collective quota to 30 million barrels a day, member countries were still pumping above the agreed quota as they have been doing for the past seven months according to Bloomberg.

The final quarter of 2014 came as a surprise to many in the market as the oil price kept falling. Investment banks quickly revised their outlooks and Morgan Stanley warned of worse days to come and said that Brent could fall to around US$43 in the worst case scenario, but held it at US$70 a barrel in the base case scenario for 2015.

Looking ahead with a bit more optimism, HSBC was one of the more bullish banks, looking at an average oil price of US$95 a barrel for Brent in 2015.

Like many major investment banks that don’t know what to expect in the coming year, the ratings agency Standard and Poor revised its outlook on the oil price downwards at least for the short term. “We recognize current spot oil prices are even significantly lower than our US$70 a barrel Brent average price assumption in 2015.”

Stabilisation is expected to return to the market, according to S & P and the report adds “ultimately recovery is likely as oil companies curb production of high cost wells and push out new capital spending.” The agency is hoping that 2015 will be a recovery year and left its price projection for 2017 and beyond unchanged at US$85 a barrel.

While OPEC is showing a brave united front, the lower oil price will not have an even impact on the budgets of all countries. Many economies have not invested as wisely as Saudi Arabia and the United Arab Emirates, and countries like Iran has suffered greatly under sanctions.

The Iranian petroleum minister Bijan Zangeneh said it was important to demonstrate unity when he was leaving Vienna in December, but added that it would be a tougher time for his and other countries.

This week the deputy foreign minister, Hossein Amir Abdollahian told Reuters that a sustained low price would have “a negative result on all countries in the region,” and called on Saudi Arabia to “take a productive step” to change the situation.

The Iranian President Hasan Rouhani has been more vocal and accused Saudi Arabia of “conspiracy against the interests of the region.”

In its outlook for the markets in 2015, Bank of America Merrill Lynch said it expects, “the bull market in global equities will continue next year but returns will slow to single-digit rates,” citing strong fundamentals and healthy growth in the American economy.

Candace Browning, head of BofA Merrill Lynch Global Research, says that “core inflation is expected to remain steady, and as the new year begins, confidence is high, oil prices are low, the dollar is strong and Washington is relatively calm.”

Good new for America no doubt but growth around the world has been far from standardised this year and there’s a real threat of deflation in Japan and in Europe.

The bank still expects a level of global growth and that in turn should help energy demand, especially when the oil price is lower. OPEC ministers have constantly said that the growth in the global market would be the salvation of stronger oil demand and therefore price.

The report adds future growth figures for 2015, “US GDP growth is projected at 3.3 per cent, with global real GDP growth of 3.7 per cent, up from 3.2 per cent in 2014 and Euro Area GDP growth of 1.2 per cent.”

The growth rate in emerging markets is expected to be 4.5 per cent in 2015. Despite the trend to the upside, BofA Merrill Lynch Global Research team says it “sees downside risks to energy prices on the back of OPEC’s decision to allow the market to stabilise itself.”

The market can expect lower prices for now, but the bank warns of greater price volatility, adding average price expectations for 2015 to be US$77 per barrel for Brent, and a WTI forecast of US $72 per barrel. “The combination of a strong US dollar, higher interest rates and relatively subdued growth should keep other commodity prices in check in 2015.”

Oil companies are certainly carefully reviewing budgets as we begin the new year and while few will openly say they have cut back on hiring, the word on the street is that this once buoyant industry has few jobs on offer.

People will hope this will not be the trend in 2015 and many will look to higher cost production been reconsidered in the American and Canadian markets. American stockpiles were down 1.8 million barrels the last week in December, according to the US Energy Information Administration, but inventories at Cushing, Oklahoma were still on the increase.

The commodity research team at Citigroup sees the American market staying the course throughout the year, but ConocoPhillips recently said it would “defer significant investment” in some areas in the US and Canada where returns were not as expected. The oil services companies are already feeling the pinch as major oil company partners are asking for discounts and better terms.

American oil production is now at it’s highest in three decades and no one seems interested or eager to cut production. OPEC has made it clear that non-OPEC producers must share the burden of excess production, as they were the ones that caused it; so the standoff continues.

BofA Merrill Lynch says the American picture could change dramatically in 2015 as it predicts the US energy boom is set to slow. “Total U.S. energy production continues to be driven by substantial shale production; however, most shale oil projects generate very little free cash flow, which means that output is highly price-sensitive.”

The bank sees “the steep price drop will impact operations of small, levered shale producers and thus we see US shale oil output growth dropping down to half of this year’s levels.”

An average oil price above US$99 a barrel for Brent crude this year will have delivered decent enough returns to all the oil producers, but the market had got used to bigger profits in recent years and set their budgets accordingly. OPEC will hold out as long as it can with its mantra that the market will rebound.

A combination of lower non-OPEC supply, higher economic growth and oil demand and geopolitical instability might bring prices back.

But the other option is no reduction in supply, stagnant growth and resolution in conflicts in 3 major OPEC producers, Iraq, Libya and Iran that could bring even more oil on to the market. The unknown, unknowns have never been greater in this fragile and volatile oil market.