Views on Oil Prices 20150215

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Views on Oil Prices
11 February 2015
Saudi’s stand
The outcome of the Saudi Arabian stand-off, and maintenance of current production levels, in an oversupplied market, may result in either a relatively short period of low prices or a protracted shakeout of higher cost production. Saudi Arabia is making a strong stand stating its view that others (including USA & Russia) should share or take-on the reduced production roles needed to balance the market. Key date: 5 June 2015, the next OPEC meeting. We believe that changes to production levels wil be as much politically inspired decisions as economic ones.

Description

Views

  • Historically the real oil price has experienced strong shifts in price and held high and low prices for extended periods over the past 45 years. The major price shifts have usually been the result of a political action, a war or a trade decision.
  • OPEC decided to not reduce production and as a consequence lose market share, and give the financial benefit of increased prices to other producers.
  •  Several OPEC and non-OPC producers have national budgets predicated on oil at about USD 100/bbl. Some also have sufficient national cash reserves to last just half a year.
  •  In the current low oil price period OPEC members and other producers have choices. Neither is attractive: o Reduce output or convince others to reduce output to get supply to a point where prices will increase. o Adopt more austere national budgets to cope with current low oil price levels, which may last longer than first thought.
  •  Cash operating costs are broadly low enough that, national budgets aside, A significant portion of global production would remain cashflow positive for some time at USD 50/bbl prices. However exploration and new development would likely slow.
  •  Low oil prices will result in low linked LNG prices when priced according to the JCC. This method is prevalent in Asian markets. JCC’s relevance is questioned.
  •  LNG pricing in USA is usually linked as a net-back from the Henry Hub gas price which does not have a direct link to oil price.
  •  Thermal coal is not readily (physically) substitutable for oil. Gas is. Coal price relates more directly to its own supply/demand than to oil prices, and does not correlate well, nor consistently, with oil prices.
  •  The USA is reviewing its 39 yr old oil export ban. Though economists indicate relaxation would increase US’ GDP.
  •  USA has approved the KeyStone Xl pipeline from Canada to Nebraska, supplying more oil into USA and for export.
  •  The Australian government may consider an east-coast domestic market obligation scheme to direct gas to domestic industry at controlled pricing.

Catalysts

  • OPEC decisions at its 5 June 2015 meeting.
  •  USA decision to lift its 39 yr old oil export ban.
  • OPEC members or Russia pre-empting OPEC (June mtg) decisions and reducing output.
  • Marked increase in demand / offtake by consumer nations. i.e. increased economic activity.

Risks

  • Financial crisis in producer nations with low cash Reserves (Venezuela, Nigeria, Ecuador), or who are reliant on oil sales for a large part of national Income, Russia, and several other OPEC nations.
  •  Australia may decide to enforce an east coast ‘domestic reservation’ of gas.
  • Further slowdown in economies of major consumer-nations.

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