This time last year, we pointed out that energy analysts that we had spoken to were predicting that the average price for Brent crude through 2013 would fall in the range of $105-$110 a barrel. In the event, they were right on the money; at the time of writing the 2013 benchmark average stands at $108.61. Their prescience seems all the more impressive when you consider the number of regional variables that played out through the year, together with the diminishing ability of Opec to artificially regulate prices.
So, where are we heading during 2014? A Reuters’ poll of forecasts published in November put Brent at $105.40 through 2014 and $103.90 in the following year, which is broadly in line with the latest predictions coming out of the US Energy Information Administration (EIA). Naturally, there are always provisos where any oil price forecasts are concerned, but as things stand sustaining the rate at this level will require some fairly heavy tinkering on the part of Arab oil ministers – and even that might not be enough to shore-up prices.
Middle Eastern mess
Opec recently reaffirmed its production levels at 30m barrels per day (bopd), but that's still excess to requirements given that the cartel expects demand for its crude to fall to 29.6m bopd next year, as global supplies rise from outside the member states. And you need to bear in mind that output is still being disrupted from Iraq, Libya and Iran. Admittedly, Libya remains in political turmoil, while Iraq is close to agreeing to sharp cuts with western oil majors on previously agreed production targets at some of the country's largest oil fields. But Iran's potential rehabilitation presents a strategic problem for Opec and, by extension, Saudi Arabia. Following the successful brokering of an interim nuclear deal in November, Iran is planning to have international oil sanctions lifted in six months and is attempting to get an Iranian national named as Opec secretary general.
Iran is now in the process of courting western oil majors such as BP (BP.), Royal Dutch Shell (RDSB) and Total (Fr: TTA) in a bid to draw in badly needed inward investment for the country's underfunded oil and gas sector. But the Saudis, along with their brethren in Kuwait, Qatar and the United Arab Emirates, probably wouldn’t welcome Iran’s return to western oil markets, particularly as the Centre for Global Energy Studies already believes that production from the Arabian Peninsula will need to be cut by around 2m bopd next year in order to avoid a glut in the market.
The Saudi break-even level
If those cuts went ahead it would deprive these petro-states of around $81.6bn (£50bn) in annual revenues at current prices. A glut in the market, on the other hand, would be unthinkable, particularly as Saudi Arabia needs to keep oil prices above $84 a barrel in order to fund its internal fiscal commitments. As Saudi Arabia is the only member of Opec with spare capacity currently, the Kingdom's budgetary demands have effectively set a floor price for the market, and they provide another glimpse into why the oil price is critical to the internal stability of the Gulf States. (The scale effect of restrictions on Iranian exports means that the Islamic Republic's break-even level to meet its budget is now $126 a barrel, according to data from the International Monetary Fund).
A looming glut?
The intervention of Opec oil ministers should suffice to keep crude prices averaging in excess of $100 a barrel through 2014, but there are reasons to suggest that prices could eventually falter - and quite dramatically at that. Recent analysis from Barclays highlighted the fact that non-Opec output is growing at its fastest rate in three decades, and is set to out-strip global demand growth this year - a surplus that is likely to expand through 2014.
Although recent disruptions to global crude output have propped up prices, the fundamentals of the market are not supportive. The growth of shale oil output in the US has already forced Saudi Arabia and Kuwait to sell heavily discounted crude to the US simply to hold on to market share - and possibly to shore up the strategic relationship with Washington. It's a curious sign of the times that both Riyadh and Tehran are seeking to curry favour with Uncle Sam. As well they might. Short of any production shortfalls brought about by regional security issues, such as those being experienced in Nigeria and Libya, the reality is that the rapid acceleration in US and other non-Opec crude oil must eventually undermine global crude oil prices. The likely severity of this looming price contraction is impossible to quantify, and it's unlikely that we will hit a tipping point next year. But if current trends persist, it will happen. Food for thought for anyone invested in the sector - and that's most of us. Leaving aside our musings on the likely oil price trajectory, there are a number of possible developments through 2014 that could provide long-term opportunities for UK companies in the sector.
Down Mexico way
There is very real chance that Mexico will finally initiate constitutional reforms designed to break PEMEX's (Petróleos Mexicanos) monopoly on the oil and gas industry, thereby allowing overseas capital to flow in. As with Iran, Mexico is intent on both expanding and improving efficiencies within the sector. This not only represents a potential boon for the integrated majors, but also for specialist oil services providers. Indeed, PEMEX is already considering several big-ticket tenders for integrated project management work that will kick-off early next year.
A refined outlook
Major refiners, such as Shell, ExxonMobil (US: XOM) and BP were all hit by lower margins through 2013, but we are likely to see only marginal improvements in European rates through next year, although the outlook for North America is more positive due to the spread between Brent crude and WTI prices. US companies can’t export crude as yet, but they can export refined products – the profitability of which is enhanced as the spread widens. With global capacity contracting through 2013, the big US refiners will increasingly look to international markets for profits through 2014.
North Sea anxieties
Within a week or so after the Department of Energy and Climate Change (DECC) released its preliminary report into the future of North Sea oil, US major Chevron raised doubts about whether it will proceed with its £6bn Rosebank oil project in the Shetlands. It underlines growing anxieties that future investment and expansion could be thwarted due to a combination of skill shortages, fast-rising costs and uncertainties brought about by the Scottish independence debate.
Deepwater Horizons
It's over three years since BP's Macondo well fouled waters in the Gulf of Mexico, and yet shareholders are still no wiser about the final extent of the group’s financial obligations. And in the aftermath of the disaster, the outpourings from Washington were no less toxic, giving the impression that deepwater drilling for oil and gas was a busted flush. It's not. Recently, BP added two drilling rigs to the deepwater Gulf of Mexico, bringing its fleet to a record nine rigs, including its new ultra-deepwater drillship - the West Auriga. Meanwhile, Shell has just announced its intention to return to drilling in Arctic waters next July, while the New Zealand government has just awarded Norway's Statoil and Australia's Woodside Petroleum deepwater petroleum exploration permits, much to the chagrin of environmental campaigners. Contrary to Barack Obama’s assertion, oil and water obviously do mix.
