In an unprecedented economic and financial crisis where “all reference marks have disappeared,” the president of the Institut Francais du Petrole (IFP), Olivier Appert, ventured two “extreme” scenarios for the midterm oil scene.
If energy policies to control demand prevail and investments are maintained at a certain level, he said, oil prices could remain relatively stable around the level of conventional oil substitutes—$60-100/bbl.
But if the economic upturn is strong and the crisis discourages investments in supply as well as demand management, tensions will elevate prices to $100-150/bbl.
In the short term, Appert said, oil prices should hover at $30-40/bbl, possibly rising to $60/bbl at yearend.
In the longer term, he said, the fundamentals will not have changed: When the economy emerges from the crisis, energy demand will pick up—pulled along by emerging countries—and oil and gas supplies will remain concentrated in a small number of countries. Environmental concerns will continue to prevail.
Viewed more broadly, oil and energy markets will depend on the magnitude and length of the economic and financial crisis, he said.
Other uncertainties
Meanwhile the outlook is fraught with uncertainties: Will OPEC countries maintain their quota discipline? Can they survive the fall in demand as surplus capacity rises far higher than the previous 3 million bbl? Will further international tensions upset the oil market?
Despite falling exploration and production costs, which are beginning to be seen, oil and gas companies will be reluctant to engage in risky investments at current prices. Operators with high debts are particularly fragile, he said. However the impact on existing production remains slight as long as prices cover operating costs, he added, and supply cuts in 2009 should be small.
What is at stake is the prospect for future projects, Appert said. Oil companies are keeping a “wait-and-see” stance justified by the easing of pressure on supplies. So far the very large, long-term, strategically important projects are not being questioned.
Appert conceded that it was possible for falling oil prices to temper oil nationalism, but it would take some time for that to occur.
A new and larger impact on the energy market could be the new energy policies of US President Barack Obama. “It is too early to have a clear view of the new energy policy,” Appert cautioned, but if it is pushed ahead, “US oil imports should fall by many percentage points.”
He also wondered whether Russia will retain for long its role as the leading oil producer on the oil scene. He said OPEC resents Russia’s “stowaway” position within the organization and that Saudi Arabia might not accept the loss of its leading role.
Gas market impacts
However Appert believes the “Gas OPEC” that Russia has masterminded will have a more than negligible impact on the market “as Russia broadens its sphere of influence with agreements with Venezuela, Algeria, and especially Caspian countries.”
Two recent developments will have long-term consequences on both the LNG world market and on Europe’s refining market, according to Appert. The first is North America’s shale gas developments, which will impact the world LNG market as the US will likely import less gas.
The second development is the higher price of middle distillates compared to gasoline, a price expected to prevail, Appert said. As new automobile standards develop and gasoline demand falls in the US, European refineries will lose their export outlet for surplus gasoline.