North America is shifting the supply needle
We continue to believe that the near- to medium-term outlook for crude oil prices is bearish. Non-OPEC controlled supply is growing strongly driven by North America, and barring unplanned outages should run ahead of modest global demand growth. The key wildcard is OPEC’s response to the growing supply pressure. It is worth noting in this context that Iraq has the freedom and probably the capacity to boost output, and Libya and Iran both wish to increase production as circumstances allow. Significantly, Saudi Arabia seems to be suggesting that it will not necessarily offset production gains elsewhere within OPEC. It also has no interest in providing a price umbrella for relatively high-cost non-OPEC producers.
Supply/demand position: Non-OPEC supply surge
Non-OPEC supply including OPEC natural gas liquids (NGLs), which are not subject to quota, is estimated by the EIA to have increased by about 1.6mmb/d in 2013 driven by Canada and particularly the US. This comfortably exceeded global demand growth of an estimated 1.0-1.2mmb/d. Supply growth outside OPEC looks like being particularly robust in 2014. A record gain of 1.9mmb/d or 3.6% is forecast based on EIA data with North America again very much to the fore. Including OPEC NGLs the total increase in non-OPEC controlled supply could be an unprecedented 2mmb/d plus in 2014. Non-OPEC supply growth will probably ease in 2015 but is still likely to be historically robust at about 1.6mmb/d including OPEC NGLs. We believe global demand growth at perhaps 1.0-1.2mmb/d will fall significantly short of the potential supply gains in 2014/15. OPEC has belatedly acknowledged the significance of the North American supply surge and is now expecting a reduced ‘call’ on its crude production in 2014/15.
Light crude spreads: LLS swings to discount
The big story in the fourth quarter of 2013 was light crude spreads. The key developments were the resurfacing of a sizeable WTI discount to Brent and the swing from the historical premium to a significant discount of LLS, the Gulf Coast benchmark, to Brent. The WTI discount widened between the third and fourth quarters of 2013 from $4.2/bbl to $10.9/bbl, while LLS on the same basis swung from parity to Brent to a discount of $7.4/bbl. In mid-January 2014 WTI and LLS were trading at discounts to Brent of $12/bbl and $1/bbl respectively. The underlying issue behind the recent developments in spreads was a build-up of supply in the Mid-Continent and increasingly along the Gulf Coast. WTI and LLS are likely to trade at significant structural discounts to Brent for the foreseeable future.
Price forecasts: Brent unchanged, WTI downgraded
We are leaving our Brent forecast for 2014 unchanged at $103/bbl, down 5% on 2013. We forecast a similar decline for 2015. The downward trend stems from the potential for an easing of geopolitical tension and our bearish supply/demand balance scenario. Reflecting the US supply build-up, we have reduced our WTI forecast for 2014 from $96.5/bbl to $94.0/bbl. We forecast a further softening to $89.5/bbl for 2015. The forecasts would be subject to downside risk in the event of an early large-scale resumption of Libyan and Iranian exports.
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