Crude Oil Outlook 2015

Ever wonder what a real oil war looks like?

I know it’s easy to conjure images of the M1A1 Abrams tanks that swept across the desert during the First Iraq War, but the conflict to which I’m referring isn’t fought by conventional means.

This time, the world’s oil supply itself has become a battleground for an energy war that’s been waged since 2008.

Making things even more complicated is the fact that this time, the supply war is being waged on three fronts… two of which are part of the same family.

OPEC‘s Crisis of Confidence

It’s good to see OPEC back to its bickering self once again.

You remember when it happened before, don’t you? Just hop in a DeLorean and go back nearly a decade, when the oil cartel was split down the middle over supply decisions.

It was a regular West Side Story, with members falling under one of two gangs: There were the production hawks like Iran and Venezuela, who salivated over higher oil prices. On the other side of the aisle, there were the doves, led by Saudi Arabia, Kuwait, and the UAE.

Makes sense, right?

Think of the situation as a fight between the haves and have-nots.

Saudi Arabia and Kuwait were two of the few members that were actually capable of increasing output by any significant amount. Of course, it also didn’t hurt that the Saudis were able to extract their crude for much cheaper than countries like Venezuela, which produces extra heavy oil in the Orinoco Oil Belt.

Nothing mends a rift better than cash. In 2008, OPEC’s net revenue from exporting crude oil topped $970 billion. Three years later, higher oil prices pushed the value of OPEC petroleum exports to $1.15 trillion; in 2012, that value climbed to a staggering $1.26 trillion.

It’s hard to argue against higher prices when that cash single-handedly allowed countries like Saudi Arabia to avoid having to deal with their own Arab Spring.

Fast-forward to today, and this old rivalry is once again the center of attention.

The question now — and one of the few potential short-term bullish catalysts for crude prices — is whether OPEC’s price hawks can convince the group to cut production. In September, OPEC production increased to 30.47 million barrels per day.

OPEC doesn’t expect 2015 to be a cash windfall, either.

According to OPEC’s monthly oil report, the group expects global demand growth to reach about 1 million barrels per day, then rise slightly in 2015 by 1.19 million barrels per day. Meanwhile, demand for OPEC crude over the next 12 months is projected to be around 29.5 million barrels per day.

It’s a coin-flip on what OPEC decides, and right now, it all depends on the headline you happen to be reading.

The International Energy Agency (IEA) thinks OPEC won’t cut production, instead predicting an all-out price war with the West. After all, wasn’t it Saudi Arabia that chose to lower prices recently?

Here’s the problem…

This isn’t the 1980s, and there’s no flux capacitor available that can bring the Saudis back to their glory days, when it cost them just $4 to produce a barrel of oil.

Not only does their spare capacity consist of poorer-quality heavy crude (which many European refiners simply can’t handle), but Ghawar — their largest oil field — is officially the world’s largest wishing well given how much seawater Saudi Aramco injects into it on a daily basis.

So much for being a price dove.

And then we get to the real supply threat that is causing OPEC’s crisis of confidence… and it isn’t coming from a fellow OPEC companion…

Crude Oil Outlook 2015: A Challenger Appears

The Saudi Oil Minister wasn’t kidding around when he said the shale boom is a serious threat to the Saudi economy.

Truth is, it’s a danger to the entire OPEC alliance.

Considering that U.S. companies are extracting around 8.5 million barrels of oil per day — which is projected to increase to 9.5 million barrels per day next year (according to the EIA’s latest Short-Term Energy Outlook) — it was only a matter of time before we reduced our reliance on foreign oil.

And while we still import around 1.2 million barrels of oil per day from Saudi Arabia, other OPEC members are losing their market share in the United States.

Our crude oil imports from Nigeria, for example, fell to just 61,000 barrels per day last July. To put that into better perspective, imports from Nigeria have plunged 94% since 2010.

OPEC exports to the U.S. in general are about 16% lower now than they were three years ago.

Across the entire energy sector, net imports only account for around 10% of our total energy consumption.

On the demand side, we won’t see the same kind of growth in 2015 that we did last year, when U.S. liquids fuels consumption grew at a rate of 2.5%. The EIA expects total consumption to actually decline slightly this year, then increase by less than 1% in 2015.

As you might expect, that put a downward pressure on WTI prices, which are currently projected to average $94.58 per barrel.

Recently, the head honcho at ExxonMobil said that the U.S. was in a “transformative moment in the history of energy.”

Unfortunately, there’s more to the tight oil revolution taking place in the United States than just the benefits.

Any sustained slump in prices will lead to a considerable slowdown in activity on the part of U.S. drillers. In fact, analysts from Deutsch Bank suggested that if OPEC fails to lower output (and continues its price war against the West), then about 9% of the tight oil production in the United States would become uneconomical.

If prices drop below $80, that amount rises to 40%.

I’ll leave you with this question: Who’s going to blink first?

Until next time,

Keith Kohl

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