Energy Prices: Does the Current Recovery Have Legs?

Spend Matters welcomes this guest post from Cristian Niculescu-Marcu, senior economist at IHS.

Despite a lackluster global economy and some worrying manufacturing sector signals coming from China and the U.S., growing seasonal strength is providing support to energy prices as they rally from January's multi-year lows. IHS anticipates that global liquids demand will rise by about 1.2 MMb/d in 2016 — growth that, while less than last year’s, is nonetheless key to reducing the world's crude oil supply overhang.

Crude Oil Prices

Natural Gas Prices 

Saudi Arabia, Russia and more than a dozen other oil producers met in Doha, Qatar, on April 17 to widen efforts to “freeze” production. The meeting was a continuation of a process begun in February by Saudi Arabia, Venezuela, Qatar and Russia to keep production at January levels, but the Doha talks collapsed as Saudi Arabia refused to countenance any freeze without some participation commitment from Iran. Despite a temporary decline, crude oil prices soon resumed their rally driven by supply outages in Kuwait and Canada and expectations of tightening global fundamentals.  

In light of the insistence by Saudi Arabia that it will not freeze output unless Iran and others do, it will be interesting to see whether these differences can be reconciled at some point. Saudi Arabia's oil minister change is not expected to result in a change of strategy but could perhaps turn over a new leaf in negotiations. In any event, the impact of any deal to “freeze” production would largely be on market psychology, not physical barrels, because almost all producers, with the notable exception of Saudi Arabia, are producing as much as they can.

Brent oil:  After bottoming in mid-January under $30/bbl, Brent prices have seen a sustained rally in recent months. The overall driver for this has been a tightening global market, which has seen the production overhang declining from over 3 million barrels/day in January to less than 2 million barrels/day in March, and will continue to dwindle over coming months towards a rough balance by mid-year. Therefore the current upward trend in crude oil will continue with $50/bbl being reached in the third quarter. Temporary supply outages in Canada and Kuwait and steady consumption fundamentals have also helped prices to rally off very low levels.

IHS does expect the global oil market to move from a supply glut to balance in mid-2016. Next quarter, seasonal demand strength will push world liquids demand above liquids supply for the first time since 2013. Continued production declines of “price-sensitive barrels” — especially U.S. tight oil — are critical to this transition. However, this is a slow process and, looking ahead to 2017, the market is expected to stay roughly balanced, limiting the sustained upward price pressure. IHS projects Brent will average about $44/barrel in 2016 and $52/barrel in 2017.

Henry Hub natural gas: The North American natural gas market is oversupplied, as a mild winter and robust production have kept storage inventories near record highs. With coal-to-gas displacement already maximized and heating load declining, the demand side will be unable to reduce this imbalance, so the supply side will need to respond. As a result, prices will remain low throughout 2016, averaging just $2.10/MMBtu for the year, with levels slightly higher in the second half. Longer term, prices are not expected to breach the $3 mark until mid-2018.

Additionally, regulatory concerns arising on the back of a pipeline explosion near Pittsburgh in late April may come to pose headwinds for supply-side growth. Risk therefore could start to shift to the upside, especially with summer just around the corner producing higher consumption demand from new gas power plants.

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