By Marina Petroleka, Business Monitor International
BMI View: Although we expect Brent to stabilize in 1Q 2014, the market is shifting into a sustained period of improved supply and we have downgraded our price forecasts for 2014 and beyond. 2015 will see Brent trade within a range of US$95 to $105 per barrel (bbl), a marked decline from recent years, before average prices trend below $100/bbl from 2016 onward. We forecast front-month Brent to average $105.5/bbl in 2014 and $100.5/bbl in 2015, down from our previous forecasts of $109.8/bbl and $108/bbl, respectively.
Short-Term Outlook (Three-To-Six Months)
We expect $90/bbl to $95/bbl to provide a ﬂoor for Brent prices in the coming weeks. Net speculative sentiment towards Brent has collapsed since June, pricing out the risk premium that was built into prices over H114 as a result of the Russia-Ukraine, Libya and Iraq crises. With prices having broken below the psychologically important level of $100/bbl, anticipation for a reduction in OPEC output will grow and this will help bolster prices.Saudi Arabia reportedly already took 400,000 bbl/d of production oﬄine in August. With net managed money Brent positions on the ICE exchange already at the lowest level in two years, it will only take a modest improvement in price fundamentals to stem the rout in Brent prices.
A structural shift in the global oil market stemming from non-OPEC producers will continue to take hold. Following years of breakneck growth in U.S. oil production, the effects of the country's shale oil revolution are now making a tangible impact on the global oil balance. The global market is shifting into surplus, driven by a glut in the light sweet crude market resulting from strong supply and weak demand. Brent futures have weakened substantially since June, in spite of elevated political/security risk to supply, as a direct result of a backlog of crude oil supply in the Atlantic market. Robust U.S. production is resulting in declining U.S. imports, while European demand is too weak to pick up the extra volumes, especially those out of West Africa. In illustration of this near-term oversupply, the ICE futures curve has shifted into a contango structure for the first time since 2010 .
Despite risk to supply in certain major producers remaining elevated, we expect fundamental supply and demand drivers of the Brent price to gain prominence and force prices lower over the coming years.
Combined, the two centers of demand for Brent (Europe and Asia) will present an underwhelming picture in the coming years. We forecast European demand to remain weak in the coming years, a continuation of a structural decline in demand for oil-based fuels. A weakened European macro picture over much of 2014 is reﬂected in lower month on month demand for fuels. With the slight exception of March 2014, in all other months, fuels demand was lower in 2014 compared to 2011, 2012 and 2013. We forecast that European fuels consumption will decline by an annual average of 0.2% each year between 2014 and 2018. Total consumption will be 13.5MM bbl/d in 2015, a marked decline from 15.3 MMbbl/d in 2000.
Asia demand will be a source of growth, even though Chinese demand growth will be less impressive than previous years. We forecast Chinese average annual growth in fuels consumption to be 2% between 2014 and 2018; a steep slowdown from the 6% between 2007 and 2013.
Our global supply/demand balance forecast supports a bearish multiyear oil price outlook. We forecast that supply will be greater than demand from 2016 onward, with an average annual surplus of about 350,000 bbl/d over 2014 to 2023, including an allowance for unplanned outages (equivalent to 1% of total oil capacity each year).
Brent prices will decline through 2018 as global surpluses grow. Thereafter, we expect lower prices to result in some mothballing of expensive production assets, which will in turn reduce the surplus and put a ﬂoor under prices .
Marina Petroleka is the head of energy and infrastructure research at Business Monitor International in London. She leads BMI's integrated strategic analysis for the oil and gas, power, renewables and infrastructure sectors.
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