Divining the Future for Oil Prices: Where will it end?
“Oil data is difficult to come by in global markets because it’s always wrong. OPEC, the International Energy Agency [IEA] and the US Energy Department never even agree on the historical numbers,” he said.
“The IEA reported an oversupply of 2 million barrels per day in its fourthquarter report for 2015. Then in February it raised the figure for that period to 2.2 million, meaning the IEA found an extra 200,000 barrels per day in the system. And the OECD inventories are increasingly explaining less about what is happening with the oversupply, which is suspicious because such a shift should be gradual.
“Something strange is going on with the IEA data, as there are massive amounts of missing barrels. In the second quarter of 2015, the IEA originally reported an oversupply of 3.3 million barrels per day. Now they report an oversupply for that same quarter of only 2.3 million.
“Based on these trends, and with my projections factoring in China, we think demand is still understated based on several hundreds of thousands of missing barrels per day. The fundamentals of oil market supply and demand haven’t weakened since the last OPEC meeting in December, yet the oil price fell from USD 50 to 27.
“We have argued the long-term Brent crude oil prices fell too much, down to USD 48 per barrel, which is the supply destruction price. Supply has indeed fallen since 2014, but now we need to see a supply creation price. The only way you could justify long-term oil prices dropping from USD 100 to 48 is if oil companies cut their structural costs by 50%. But these firms have only cut costs by 20-25%, and part of that is cyclical.
“With oil at USD 40, already 300,000 people have lost their jobs in the oil industry. Oil states are applying for crisis loans for the IMF and World Bank. It is not a sustainable price for the industry.
“But the price is gradually increasing and will continue to work its magic. The key factor was US shale oil producers finally reducing their output, which should continue for the rest of this year. The major US shale oil producers have guided capital expenditure [capex] cuts of 58% this year, but if they want to live within their cash flow at a WTI [West Texas Intermediate] price of USD 40 per barrel, they have to cut their capex by 74%.
“Global capex is projected to be cut another 27% this year after a reduction of 25% last year, which is unprecedented, worse than even the 1980s. We could see more capex cuts in 2017 — a third straight year — even with oil at USD 60, which has never happened.
“Much of the deepwater production projects have been suspended until the next decade, which particularly hurts Norway as an offshore producer.
“Demand on the industrial side has weakened, but the consumer products such as petrol, jet fuel and LPG [liquefied petroleum gas] have performed well because the price is so low. In the US consumers have started to buy 3.6% more petrol for driving and 58% of new vehicle sales there were light trucks, up from 50% the year a couple years ago. The lower oil price led to an immediate rise in the purchase of larger vehicles.
“Global electric vehicle sales in 2015 numbered 460,000 units, but in China they are selling 800,000 SUVs in just one month, so it’s going to take a bit of time to get a change in the global car fleet. Electric vehicles will eventually make a large impact on the market, but for predicting oil prices the next five years, the segment is still too small to factor in.
“Our 12-month oil price forecast is for USD 65, meaning we are optimistic about the market.”
Narendra Taneja, chairman of the
Energy Security Group of the Federation of Indian Chambers of Commerce and Industry, was more concerned with why oil prices fell so low.
“Why did nobody predict the drop in oil prices? Analysts like to point to only supply and demand, but where was the demand reduction? Nobody can point to any example of this. Politics seems to play a part, as the US tried to force its hand with Russia and Saudi Arabia,” said Mr Taneja.
“I believe it was a hysteria that brought down oil prices, as exuberance for renewable energy caught fire. Undoubtedly the share of renewables in the energy mix will grow, but it will be a gradual process, as this transition is going to take 40 to 70 years.
“Low oil prices help certain countries such as India that are major importers, as we can spend more of our annual budget on schools and hospitals. But is the short-term gain worth it in the long term, as weak oil demand is in part because of struggling global economies, and India’s exports are down across the board.
“Also, can India, China or Europe handle it if persistent low oil prices cause the Middle East to go up in flames economically, socially and maybe politically if key regimes buckle under the pressure?
“I think the right price for the next two to three years is USD 50-68. This is a price that will keep the Middle East stable.
“Oil will remain the king of energy for at least the next 30 years, but in my view, from 2080 and beyond the energy space is going to be all about nuclear power once we make it safe. I know it is not fashionable to say this, but I honestly believe this because I include solar as nuclear power since the sun is a nuclear reactor itself.
“The talks in Doha [in April] on an oil freeze are more about trying to find a trick to raise oil prices rather than lowering production because continued low prices are not sustainable for the Middle East, Russia and several other producing countries.”
Mr Kjus noted some of the commentary on a showdown between oil powers was misguided.
“While the showdown has been pitted as OPEC versus US shale production, with the former trying to keep prices low to drive the latter out of the market, I would contend the Saudis have known for some time they can’t put US shale oil out of business because of its low production costs,” he said. “The Saudis’ goal was to drive the expensive, sticky oil out of the market, such as the deepwater projects and Canadian oil sands. This will leave the market for a long time as the investment horizon is seven to 10 years, so in that respect the Saudis have been successful in driving excess capacity out of the market.”
Mr Taneja is still quite bullish on oil demand over the medium term.
“We have 2.7 billion people living below the energy poverty line,” he said. “There are another 2 billion people who have access to energy, but not of the same quality as in developed economies. Both groups want to move up, which means demand for energy is going to go through the roof.”
“The IEA predicted renewables will make up only 30% of the energy mix by 2040, so I think fossil fuels will still have a big role to play going forward. But I think 50% of power producers will go out of business eventually as more power consumers use renewable energy to produce their own power.
Mr Kjus said it is important to draw distinctions in the fossil fuel-renewable energy debate.
“In these debates people always want to lump all fossil fuels together against renewable energy,” he said. “But in the OECD we don’t use oil to generate power, unlike wind and solar. They are not direct competitors. Oil is used mainly for transport. Electric cars are making inroads, with Tesla’s new model selling like mad, but it’s coming from such a low base it will take at least a generation to make an impact on the total figures.”
“For coal, you see it already being affected as renewable energy takes a larger share. It’s actually a positive for renewable energy if the oil price rises, as that means gas prices in Asia will increase and there will be more incentive to develop renewable technology quickly.”
“I like to say the shipping industry goes in vicious and virtuous circles,” he said. “It just happens we are in the former.”
“We believe the worst is still to come because cash flows are drying up and contracts expiring that were signed before the downturn,” he said. “This means a major restructuring, with some firms going out of business, as well as mergers or new owners. But Norway has been through this all before and we are confident we will come out stronger when the industry finally rebounds.”
“These are going to be very tough times in the near future. Yet Norway has one of the largest shipping fleets in the world and one of the most diversified. And this is one of the most adaptive industries to change in the world. From oil tankers to gas tankers, ro-ro ships, selfloading devices, offshore and specialised vessels, we have absorbed whatever the market wants. Our history demonstrates the industry has the capacity to deal with sea changes to the market and new opportunities. But this will not be a frictionless process as a number of companies are struggling to survive.
“While some companies are moving towards massive cost cuts, others have shifted to offshore and renewable energy such as wind farm maintenance and servicing. Ocean mining and fish farming are now being developed. Some shipping companies are in desperation mode, but at least it’s a way for them to stay afloat.
“We also believe energy efficiency in the maritime industry is poised for major improvements, whether it be new fuels or hull designs, so this will help with costs. Shipping is already the most environmentally friendly form of transport. I think in the future we will be seeing more Teslas of the sea.”
The main reason Mr Henriksen is optimistic is Norway has built up strength in specialised and technical skills.
“Going forward it is critical not to lose this critical mass of competencies, nurturing and adapting to market changes. Cost controls, increasing efficiency, layoffs and laid-up ships are all already a reality. This is a fiercely competitive international industry, meaning it is especially sensitive to small changes in national maritime policies, which the Norwegian government should note when devising its new strategy,” he said.
“Finally it is time for my generation to contribute,” she said at the Norway-Asia Business Summit 2016. “We’ve never had a national crisis during my time, but export development since 1998 in Norway has been worse than Denmark, Sweden and Switzerland.”
“The average lifespan of a Norwegian company for the previous generation was 60 years. Now it is 13.
“Fortunately Norway is wellplaced to succeed as its innovation strategy is based on clean technology, sustainability, whole system designs and renewable energy. We have competence in all these areas already and a proven system of industry clusters that helps new companies develop.
“I see six sectors that offer strong opportunities for Norway: clean energy, ocean space, health and welfare, bio-economy, smart societies, and tourism and creative economy. It is essential that we export, internationalise and compete as Norway is a small economy.”
Mrs Traaseth called on the country to work on industrialising the medical technology industry as well to take advantage of an increasing number of ageing countries.
“The key driver for innovation is competition and fear of failure,” she said. “This will be a challenge for the public sector and monopolies, but we cannot afford to sit back as almost every entrenched industry is being disrupted by technology.”
Walter Qvam, president and chief executive of Kongsberg Gruppen, echoed her sentiments that industrial digitalization is the wave of the future, pointing to big data analytics, the Internet of Things, robotics, 3D printing, software, autonomous vehicles and connectivity as technologies that are already affecting its clients across a number of sectors.
augmented reality, the Internet of Things, big data, automation and robots, and underwater autonomous vehicles (UAV) enable numerous improvements. There is particular promise for this last application — UAVs — and Kongsberg is the market leader in this segment. Shipping also generates enormous amounts of data, much of which has not been analysed.
“There is demand for surveillance around the South China Sea, and UAVs can monitor in that area. Other potential fields for maritime include wireless communication under water, connecting various sensors, and mapping and surveillance for research, minerals and security issues.”
Mr Chia pointed to deep-sea mining, where devices pick up polymetallic nodules on the seabed some 3,500 to 4,000 metres below the surface, as another ocean option. The Singaporean government has a concession in the Pacific Ocean between Hawaii and California to extract these potato-sized nodules from the seabed surface.
There has been much publicity about the new Northeast Passage, an Arctic shipping route following Russia and Norway’s coasts that used to be covered by ice. Global warming has caused part of this ice pack to melt, enabling a maritime route some 33% shorter between Asia and Europe.
“Right now much talk concerning the Northeast Passage has been about politics and security, but maybe Singapore and Norway could meet about business opportunities in the Arctic because Kongsberg is getting so many inquiries about natural resources, oil and gas, maritime support services and tourism opportunities in that region,” said Mr Qvam. “We also run polar satellites from Svalbard and there is lots of interest in that island.”
“I think the Northeast Passage has been overhyped thus far because only a tiny fraction of the total shipping volume takes that route,” said Mr Henriksen. “Having said that, Norway is working within the Arctic Business Council to develop standards for doing business there, including for the vast natural resources.”
Sharanjit Leyl, moderator for the session, said the World Wildlife Fund estimates the global fishing fleet is twoand-a-half times larger than oceans can support. She wondered how maritime could play a part in environmental change.
“We know the global fishing fleet is too large to be sustainable so one opportunity is the use of surveillance devices to monitor violators,” said Mr Qvam. “This technology already exists so we just need enforcement.”