Daniel Lacalle

Oil Price Outlook. Bounce Could Be Short Lived

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The global glut in the oil markets continues. See the interview courtesy of IG.

As we explained in our book “The Energy World Is Flat” (Wiley, 2014), the forces that keep flattening the world are working, not only to make the era of high oil prices a distant memory, but also to ensure ample supply for many decades.

Global supply is stronger than ever:

. OPEC output at record 31.5 mbpd. If Iran and Irak add, as I expect, another 1.5mbpd to the market, not only we will see global spare capacity rise (currently at 2.7mbpd), but a surge in “low cost-high quality” barrels, as the oil from those two countries is not only very cheap to extract and develop (as low as $10-20 a barrel), but ranks among the best in terms of API quality.

. Despite large capex cuts and cost savings, US production remains above 9.4mbpd, a fact that not only improves the supply picture, but also reduces the geopolitical premium that we used to attach to the price of a barrel.

. Russia remains strong above 10mbpd.

On the demand side, although global demand estimates have been revised slightly up, the concerns about China, consumer of c11% of total world production, are making international investors nervous.

Efficiency keeps eroding demand growth as well. The IEA estimates that efficiency takes away up to 2mbpd from the estimates of demand growth per annum.

Even with a global demand growth of 1.3%, supply growth will be higher for a third consecutive year.

Technology and substitution continue to make the oil market better supplied, more diversified and less impacted by bottlenecks. Oil demand is c70% for transport. As hybrids, electric cars, natural gas vehicles and synthetic jet fuels develop, the market share of oil in transport has only one way to go. Down.



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