The recent return of volatility to the global crude oil market has sparked substantial speculation as to future price, supply, and demand. While price volatility may continue, examination of the best available global data shows stable and increasing crude oil demand as well as adequate long-term supply. Sustained lower prices of crude may well induce new long-term investment in the infrastructure needed to supply the growing demand for refined hydrocarbon products.
The Organization of Petroleum Exporting Countries (OPEC) agreed on November 27, 2014 not to reduce its 30 million per day agreed limit on members’ total crude production. The global crude oil market reacted by selling off crude derivative products, effectively creating contango markets in both West Texas Intermediate (WTI) and Brent futures contracts.
Analysts have described the OPEC decision in market reality and geo-political terms. The Wall Street Journal’s reporter Nicole Friedman states on December 1, 2014 that “the global oil market is oversupplied by between one and two million barrels a day, according to most estimates.” Market analysts note that the North American unconventional production revolution has diversified global supply and diminished OPEC’s pricing influence. Geo-political theories ascribe the OPEC decision to on-going tension between Saudi Arabia and Iran as well as long-term strategic concerns regarding increased competition between OPEC, Russian, and North American crude production.
Wall Street analysts have given widely varying interpretations regarding the effect of the return of crude price volatility on individual E&P companies and plays. Notably this speculation has focused on the effect of lower crude oil prices on drilling in individual plays by specific companies. Public modeling of the full effect of the OPEC decision on the global crude flow from rock to gas tank has yet to be revealed. For example the rapid expansion of the North American midstream and downstream infrastructure, particularly along the U.S. Gulf Coast, will likely affect the global refined products market place with follow-on effects on crude oil production not likely reflected in the current market.
The International Energy Administration, the United States Energy Information Agency, and OPEC all agree that the recent downturn in the global price of oil stem from recent slower global economic growth and the rapid increase in production from unconventional US shale plays. While seeing long-term supply and demand growth, all three organizations agree that significant geo-political turmoil could introduce greater instability into the global hydrocarbon market with resulting social and economic disruption.
Conclusion
Despite the recent return of greater volatility due to the OPEC meeting this Thanksgiving, the continued increase in US light, tight oil production combined with added US Gulf downstream refining capacity will give the world the flexibility to meet its energy needs and the capacity to weather most possible future geo-political storms.
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Tom Morgan
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