Insights -

Coronavirus and Saudi Arabia oil policies: Modelled Oil Price Scenarios to 2030

The oil market remains oversupplied, as it has since 2014 and this is most likely to continue to the middle of the decade. Thereafter, the scenarios forecast a rise in oil price to $70-80/b (real terms Brent, Q4 2019) as the market tightens. The impact of coronavirus on the global economy in 2020 and 2021 is profound with global recession and a decline in oil demand. The impact of excess production by Saudi Arabia is significantly less important in reducing the oil price. The modelling indicates that Saudi Arabia’s market share policy announced in March 2020 will be a futile gesture in the face of falling oil demand. Throughout the first half of this decade the people of Saudi Arabia would be best served by a policy of maximising revenues rather then market share by production. Read more

Electric Vehicles: Optimum Strategy and Impact on Oil demand (November 2019)

Road transport offers the fastest pathway with the largest impact to reduce oil demand. Not only is it the single largest demand sector (45%) but the 10 year average cycle time of a road vehicle is much less than for other sectors such as air and marine transport. the displacement of gasoline/diesel vehicles by electric vehicles will take time due to issues of affordability, consumer convenience, infrastructure development, manufacturing capacity and the limits imposed by the stock cycle time of road vehicles. The optimum strategy to reduce green house gas emissions is to deploy plug-in electric hybrids followed by fuel cell vehicles in the 2025-2030 period. Plug-in electric hybrids have LOWER green house gas emissions full cycle than battery electric vehicles and can be deployed much faster and at much lower cost. Even with the most aggressive electric vehicle market penetration, oil demand is expected to continue to rise to more than 110 million b/d in the early 2030s before falling. Read more

OPEC and Saudi Arabia’s perennial policy dilemma – long term production cuts or market share ? (April 2019)

In an oversupplied market, the principle determinant of the oil price is OPEC’s (i.e. Saudi Arabia’s) policy. The dilemma for Saudi Arabia/OPEC is whether to: pursue market share at a lower price in an attempt to squeeze out higher cost oil; or to manage production at a lower level to achieve price range that maximises oil revenues. What should Saudi Arabia/OPEC’s policy objectives be, what are they likely to be, and what can we learn from previous occasions when the market switched from balanced to oversupplied, in the 1980s and in 2014? Read more

OPEC – a Blessing not a Curse – Damaging impact of US Congress “NOPEC” bill on oil markets, upstream investment, US strategic interests and the global economy (February 2019)

In short, a Managed Market with stable oil price in the $75-80/b range yields better outcomes for short and long term price stability, the US economy, the global economy and social and political stability in fragile states in the Middle East, Asia, Africa and South America. An Unmanaged Market introduces short and long-term price instability that will be damaging to the global economy, reduces global liquidity with risks to equity and bond markets, and risks instability in the Middle East and Africa – conflicts with significant long-term costs to Europe and the USA. An unmanaged oil market damages US interests economically and strategically.

OPEC is a blessing not a curse. Read more

Oil Market and Oil Price over the next 5 years (2017)

The period of high oil price, above $90/b, from 2009 to 2014 caused a rapid rise in USA production, mainly LTO, and an easing of demand. In November 2014, OPEC decided not to support the falling oil price but to use the opportunity to move the price to even lower levels to try to throttle the supply of LTO from the USA. The oil price declined rapidly into 2015, further driven by an increase in oil production by Saudi Arabia over and above market demand. The result was a significant build up of oil stocks. By early 2016 oil prices were weighed down by this large stock overhang and touched $26/b in January 2016.

To make sure this stock overhang on the market was eliminated as quickly as possible, OPEC, together with some non-OPEC countries, agreed in November 2016 to trim production. As the market swings back into a dynamic balance with normal stock levels what are the likely price pathways and what are the potential disrupters over the next few years? Read more

OPEC and Saudi Arabia oil policy options in response to USA shale oil (2017)

USA shale oil (light tight oil or LTO) poses new challenges to OPEC’s ability to manage the oil market. These challenges arise from two specific characteristics of shale oil production that distinguish it from other non-OPEC production. Whilst these characteristics offer significant challenges to OPEC, analysis can also provide insight into how the oil market may be managed. Read more

Oil Market, Oil Price and Demand for Saudi Oil to 2030 (2017)

Between 2022 and 2030, demand growth is expected to steadily outpace supply growth. The tightening of supply will be exacerbated by the lack of investment and deferred oil development projects and exploration in non-OPEC countries due to the low oil price period between 2015 and 2018. There is a steady erosion of spare production capacity throughout this period accompanied by a rise in price and a degree of price volatility in some scenarios depending on the interaction between OPEC and USA light tight oil (LTO or shale oil). The oil price could exceed $100/b in real terms by 2030.

After 2030, non-OPEC oil production starts a more or less terminal decline at the same time as global demand also peaks and declines. This latter trend is driven by: demographics, economic maturity of major consuming countries, displacement of oil as a transport fuel by the then mature and cost effective technologies and consumer behaviour. The interaction of closely matching supply and demand after 2030 as both decline causes considerable price and economic volatility in some scenarios. Read more

US Gasoline Price – Principal Factors (2017)

The response of Saudi Arabia and OPEC compliance will be the main determinants of the world oil price. We believe that at some point before 2020, Saudi Arabia may have to go further than simply try to keep the oil price in a $55-60/b channel in order to balance its budget. Saudi Arabia’s budget requires $80/b to be in balance. Other critical factors are: the recovery of production in Libya; and the potential for supply decline in Venezuela due to civil unrest and failure to pay suppliers.

USA LTO is a price taker with significant time lags, some 6-12 months, between price signal and production response. The three principal producing areas (Permian, Bakken and Eagleford) have similar but slightly different cost of supply curves. The Permian basin has a lower cost of supply than the other two areas. We forecast that the recovery of drilling rig numbers in the Permian basin through the latter part of 2016 and early 2017 will cause a significant rise in Permian LTO production in 2017 and 2018. Read more

Oil market at a critical point – What next? (The Hedge Fund Journal, 2016)

The oil market entered a new era in November 2014 when Saudi Arabia decided not to support the oil price in pursuit of market share. The preceding years of high oil price had driven the rapid expansion of high cost production, especially US light tight oil (LTO or shale oil) and suppressed demand growth.

The oil price fell rapidly from $80/b in November 2014 to $56/b in March 2015. Saudi Arabia added further downward impetus by raising production and a phase of major stick building ensued. In January 2016 oil prices tested levels below $30/b. If, how and when the oil market rebalances will profoundly impact the oil price into the next decade. The interaction between three critical factors is involve din this process: elimination of excess stocks, decline of USA light tight oil and Saudi Arabia’s policy. Read more

Iraq energy potential in context (2013)

Subdued global demand growth and rising non-OPEC production means that Iraq’s oil not as critical to global supply as in 2008. Capacity growth of 3 million b/d by 2025 would still be comfortable for global supply. The call on OPEC is flat or declining until 2018. Expansion of Iraq’s capacity by 6 million b/d by 2025 is possible but challenging given the business and political environment. Water supply for injection in the oil fields in the south is critical and if further delayed will impact development of the Mishrif reservoir in West Qurna. A strategic oil fund is recommended with fuel flexibility in power generation. Gas export potential is considered marginal and risky as most of Iraq’s gas is associated. Read more

2011- Gas Supply to Europe – Strategic and Global Context

Iraq’s Technical Service Contracts – A Good Deal For Iraq? (MEES 2009)

The bid plateau production rates for West Qurna 1 (2.325mn b/d), Rumaila (2.8mn b/d) and Zubair (1.125mn b/d) fields are neither possible nor necessary until after 2017. Not possible because of the logistical requirements, particularly drilling, the shortage of water for injection and the need for new export infrastructure; and not necessary because a likely subdued call on OPEC will cap Iraq’s production to 4-5mn b/d between 2014 and 2018. Thereafter, higher Iraqi production capacity will be needed, but the required investment pace can be more leisurely over the next decade.

A direct comparison of the KRG PSC with the TSC applied by the Ministry of Oil in Baghdad reveals a number of serious shortcomings in the KRG PSC. In the first place, even for small exploration projects such as the Shamaran PSC the contractor’s rate of return of more than 30% for oil prices greater than $65/B is internationally excessive. Secondly, the KRG PSC delivers too great a windfall profit to the contractor at higher oil prices. Read more

Shell tapped to draw up Iraq gas blueprint (2009)

In a breakthrough in its strategy to gain a meaningful role in Iraq’s oil and gas industry, Royal Dutch/Shell Group has been tapped by the government to help formulate a blueprint for developing the country’s moribund natural gas sector.

The initiative is a rare prize for Shell, which is in a long line of oil companies anxiously waiting to secure production contracts in a country that houses the world’s second-largest oil reserves after Saudi Arabia and big potential for gas.

Those efforts have been stymied for years, first by sanctions and more recently by the rocky aftermath of last year’s U.S.-led overthrow of Saddam Hussein. Read more