OGJ Senior Editor-Economics
HOUSTON, May 6 -- In its latest Stockwatch Quarterly Review, Energy Security Analysis Inc. (ESAI), Boston, forecasts that over the next 2 years, the fundamentally sustainable price range for crude is $70-90/bbl.
ESAI Pres. Sarah Emerson said, “Obviously the price can break out of this range, and we see more potential for a breakout on the upside, but that will require either a supply-side event or signals from outside of the oil patch.”
The price forecast is based on six fundamental signals, including that the marginal cost of production outside the Organization of Petroleum Exporting Countries is set by Canadian oil sands. That cost, on a delivered basis, exceeds $65/bbl. This puts a flexible floor under prices for a period of time, ESAI said.
Another factor cited in the forecast is OPEC spare production capacity, which has climbed as a result of the recession and the organization’s subsequent pullback in output. Spare production capacity puts a flexible ceiling on prices.
Third, OPEC’s newfound spare capacity strengthens its hand in influencing prices, giving the organization the ability to prevent a large fundamental price rally by putting additional supply on the market. However, OPEC’s ability to respond to such a price rally will be hampered by the continued mismatch between OPEC’s predominantly sour crude oil and the predominance of low-sulfur petroleum products in the oil market.
The forecast also considered that coming out of the economic downturn, there is still ample refining capacity, and capacity utilization rates are at historic lows. Over the next 2 years, these utilization rates will grow, but there will still be significant spare capacity in the global refining sector, ESAI said.
The fifth fundamental driver behind the price forecast was that over the next 2 years, in a departure from the recent past, light, sweet crude production will rise by roughly 800,000 b/d in 2010 and 2011, according to ESAI. This growth will temper price spikes in the critical WTI and Brent markets.
Finally, even with a weak economy in Europe, slow recovery in the US, and sober assumptions on China, a double-dip recession is almost impossible without an unforeseen exogenous event, ESAI said.
ESAI noted that a potential development that could encourage a breakout to the upside is if oil demand surges beyond expectations in the next 2 years.
“Some forecasters are anticipating a slightly faster recovery, but ESAI’s projections are not overly conservative, therefore, it is unlikely that a demand “surge” would be dramatically higher than the projections presented in this publication. In sum, there is a risk premium in oil prices that forces the sustainable price range to begin at non-OPEC marginal production cost and extend higher,” the report said.
“But there is added risk of a breakout above the upper end of the range due to the fact it is harder to sustain supply than sustain demand. This is a reality that stems from growing populations and rising income in developing countries in the Middle East, Asia, and Latin America. This rising tide trumps the impact of weaker demand due to environmental policies and falling populations in mature economies,” ESAI said.
Over the next 2 years, non-OPEC output should enjoy a healthy renaissance, the report said, with Brazil leading the charge in higher production.
ESAI said Brazil should see output grow by 450,000 b/d through 2012, as a series of 100,000 b/d offshore fields come on stream. Over the same period, Columbian output should grow by nearly 250,000 b/d in response to the government’s aggressive courting of foreign producers. The US, Canada, Kazahkstan, and China will post increases near 200,000 b/d.
Even with output in Mexico and the North Sea dropping by a combined 1.5 million b/d through 2012, total non-OPEC crude production will still rise by over 600,000 b/d in this time frame, ESAI forecasts.
Including strong OPEC natural gas liquids growth—and higher alternative fuels output—supply growth outside OPEC will reach 2.5 million b/d over this period. This should limit the growth of the call on OPEC to just 1.9 million b/d through 2012. With total OPEC capacity conservatively rising by 1.4 million b/d at the same time, spare capacity should remain at comfortable levels above 5 million b/d, ESIA said.
Contact Marilyn Radler at email@example.com.
ESAI sees $70-90/bbl oil over next 2 years