Regina – If you have been hoping for the days of US$100 crude to return soon, don’t hold your breath. A prominent analyst for a major Canadian bank sees crude prices around $65 for the next year or two, then $75 three-to-four years from now.
Patricia Mohr, developer of the Scotiabank Commodity Price Index, was a keynote speaker on April 30 at the Williston Basin Petroleum Conference in Regina.
It is the first index designed to measure price trends for Canadian commodities in export markets.
As such, there was a strong crowd in attendance for the last speech of the conference, when people would otherwise be packing up or leaving. They wanted to hear what Mohr had to say on oil prices.
“Oil and gas accounts for almost 40 per cent of Canada’s net exports of all commodities,” she said.
Overall commodity prices were lower now, in March 2015, than they were in January 2007, Mohr noted. That’s even lower than the bottom of the 2008-09 recession. Some of this has to do with a lackluster global economy. She pointed out how iron ore has dropped about 70 per cent in price in the last year, the result of four major mining companies dropping prices and increasing production.
“Recently we have seen in this very competitive market a fight for market share in oil and the iron ore industries,” she said.
“Oil isn’t exactly the same, but definitely a market share war between Saudi Arabia, the major Gulf Cooperation Council Members, and the U.S. shales, a very interesting development.”
“I am optimistic we are close to the bottom of the downdraft in commodities. We see a slow recovery in international oil prices, which I believe is now getting underway,” she said.
“Unfortunately we’re probably going to have some added volatility in the international oil markets, a bit of a zig zag – improvement, down, improvement, for the next couple of years.”
If you had to pick one indicator of global commodities, she said, it was the purchasing manager index for manufacturing in China.
“There’s been a lot jitters about of global economic activity for a while now,” she said. “There’s a lot of jitters over the pace of growth in China.”
While China may have 7 per cent growth, that’s weak for China, she explained.
She expects a spring rally for China.
The decline in oil prices have taken a toll in the shale and conventional crude areas of the U.S., with associated losses of employment. However, they are still calling for 2.6 per cent GDP growth in the U.S., with a positive outlook for the U.S. economy.
Western Europe, which has been in near-recession for years now, is slowly recovering. Auto sales last year shifted from decline to growth. That will improve diesel demand, as well as overall petroleum product demand after a slow year last year, Mohr said.
Coming back to China, she noted that China’s industrial activity never went negative in 2008-09. China also dominates material markets. China is almost 49 per cent of global demand for base metals, while the U.S. is nine per cent. Yet now its current growth is the lowest it has been since 2008.
“I do think growth is slowing to 6.5 per cent in China,” she said, noting this impacts commodity prices.
“In global oil consumption, the United States is still dominant, with almost a 21 per cent share of world oil consumption. China is only 11 per cent, but in recent years, is growing more rapidly than the U. S.”
Mohr displayed a chart showing car ownership per 1,000 people. In the United States, it was 792. In China it was 88, and in India it’s 26.
“Every customer in China wants a motor vehicle. They don’t want e-bikes anymore,” she said.
“Is it going to be gasoline or electrically driven?”
Mohr thinks some of those Chinese vehicles will be powered by electricity, but the rest will be gasoline.
China is now 60 per cent of the world’s auto market. She said, “They love SUVs.”
Mohr said China’s potential for growth is slowing down, probably to five per cent per annum into the next decade.
She expects a “massive summer driving season in the U.S.” and a revival in the U.S. housing market.
Russia is in recession due to its involvement with Ukraine.
Shifting to oil, Mohr said, last November Saudi Arabia and the Gulf states decided not to cut production to shore up prices. This would allow prices to drop to whatever level it may take to slow development of U.S. shales.
“The Saudis have actually been quite open about this. I just think that’s kind of the way it is,” Mohr said.
North Dakota, the Texas Permian Basin and Eagle Ford added 1.28 million barrels per day production from January 2014 to January 2015.
“That increase, I have never seen anything that big in my entire career, and I have been working a very long time,” Mohr said. “You would have to go back to the early 1980s or 1970s in the Middle East to see that kind of oil production expansion.”
That directly contributed to a glut of light sweet crude, particularly in Atlantic basin markets. Nigerian oil backed out of the U.S., and ended up going to Northern Europe.
“It became quite obvious to oil trader the market for light crude was oversupplied.”
Mohr thinks the bottom for WTI was $43.75 in mid-March of this year. It had picked up to $59 by the day of her presentation.
She said she has not been willing to forecast $40 oil, saying it is not sustainable.
“Only a few regions in the world can consistently produce oil at $40 a barrel and still make money. Forty is not sustainable for any more than perhaps a month,” she said.
The average for this year, she forecast, would be $58. Mohr expects the price of oil to reach $65 by the fourth quarter of this year and level off at that price for 2016.
The reason for that forecast levelling off is U.S. shale drilling is down but there are at least 3,000 uncompleted wells waiting to be brought onto production.
Mohr went to say she expects a flattening of U.S. oil production.
“The market is responding very positively to this. It’s one of the key reasons we’ve been getting a spring rally in prices. The market globally is looking towards a slowdown in production in U.S. shales to help restore balance in global crude oil markets.
“I think we’re just on the cusp of that. I know it’s a difficult thing to endure. But at least we have the satisfaction of knowing oil prices are starting to respond positively.”
Brent oil, according to Mohr, will likely be $63 for 2015 and $70 for 2016.
In Western Canada, she noted capital expenditures are down. Spending by oil and gas producers in Canada is expected to be down about 35 per cent.
“It’s quite a dire situation for a lot drillers,” Mohr said.
She pointed out that Saskatchewan’s Bakken was at the bottom of the North American cost curve.
Service costs are down 20 to 30 per cent. She expects wages to be down as well.
At what price can the industry really survive, she asks, in making forecasts.
“Forty is too low. Fifty is marginal. I think $60 to $65 is doable, for a couple of years. I think the $65 mark is where I would put things for the next couple of years. Long-term, I think prices will move up, but in a very zig-zag fashion. I wouldn’t be surprised to see $75 crude in three-to-four years, but it’s going to take a while to happen,” she said.
In the forecast there is an assumption that international capex will drop 30 per cent and there will be slower production gains around the world are going to lead to restoration of oil market balance.
Mohr thinks Russian production will fall and she doesn’t have a lot of confidence in Iraq.
“I am the one at the bank who actually does price forecast the for all credit. I have a little bit of say in the bank reserve lending aspect of things, so let’s hope I am right,” she laughed.
Asked by Pipeline News, “How many countries does Saudi Arabia have to bomb for oil to go up?” she replied, “It’s quite interesting, isn’t it?
“Recently Brent prices have received a little bit of an uplift because of Saudi strikes in Yemen. I think the problem there is they’ve also blockaded all the ports in Yemen. There had been some fear that tankers moving from the Persian Gulf, around Yemen and up through the Suez Canal, that those tankers might be impeded. I think it’s quite doubtful that will be the case.
“Last June, June 2014, when Brent was $117 a barrel, I would have guessed at that time the geopolitical risk premium might have been $15 a barrel. Recall prices skyrocketed in June last year because that was the time ISIS first moved into Iraq, threatening the oilfields in Iraq.
“The minute the U.S. decided to launch oil strikes against ISIS, you found that geopolitical risk premium fell back a lot,” she said.
“I think the fact there’s so much shale development in the United States and the Alberta oilsands in Canada, and a lot of the world’s growth in actual oil production is now occurring in North America, in a very steady environment. So the geopolitical risk premium, a month ago, was virtually zero.
“I think that’s the reason why. Now, it can always blow out again. There’s all sorts of geopolitical risks in the Middle East. In fact, the situation recently has been the most intense, politically, that we’ve seen in a long time. But right now that geopolitical risk premium is extremely low.”