Exploring Hydrocarbon Depletion
Page added on January 30, 2017
Oil markets mostly ignored the glum forecast from BP that the world is facing a long-term oil glut that won’t disappear for 50 years. Now that is a forecast and as we have seen in the past year, forecasts and commodities do not always make an accurate fit.
Figures from Baker Hughes on Friday revealed that the number of active U.S. rigs drilling for oil rose by 15 to 566 rigs this week. The total active US rig count, which includes oil and natural-gas rigs, also rose by 18 to 712, according to Baker Hughes.
March West Texas Intermediate crude slid 61 cents, or 1.1%, to settle at $53.17 a barrel in New York. It settled at $US53.78 on Thursday, the highest finish since January 6, according to FactSet data. For the week, the March contract was down less than 0.1% from the $US53.22 it settled at on January 20 but it was about 1.4% higher than the settlement for last Friday’s front-month February contract.
In London, March Brent crude lost 72 cents, or 1.3% to $US55.52 a barrel. The contract settled slightly lower at $US55.49 a week ago.
There is still the belief that OPEC’s cuts and those of major non-OPEC producers such as Russia, will help put a cushion under prices – regardless of whether the higher prices bring a surge in production, especially in the US – where the rise in rig use suggests that there will be a jump in output from the June quarter onwards.
In fact US oil rig use has risen by 44 or 8.4% in the past two weeks, the biggest rise for a fortnightly period for several years.
BP’s assessment that oil companies should brace for prolonged pressure from low prices is something that should be taken seriously, especially as renewables make a growing impact on demand and supply. Longterm, which is past the middle of 2017, prices will remain under downward pressure, and they still have a long way to go regain the $US114 a barrel level they were in mid 2014 when the slide started.
BP revised down its forecast for total energy demand into 2035 by almost 1% relative to last year, primarily due to a revision of China’s coal demand due to slower growth prospects. That has helped boost coal prices to their highest levels since 2011, but they ave fallen 40% in the past six weeks.
BP said renewable sources of energy such as wind and solar power are expected to quadruple, with non-fossil fuels providing half of the increase in energy consumption.
Gas, which is seen as a less polluting fossil fuel in the transition to cleaner energy, will see consumption grow faster than oil and coal at an annual rate of 1.6%, while oil will rise at just 0.7% a year. Renewables will grow at nearly 8% a year.
BP pointed out in its latest energy market outlook that there was twice as much technically recoverable oil available as the world is expected to need between now and 2050, making it likely that some oil reserves will never be extracted. So much for the phoney story of ‘peak oil’.
BP says the surplus should spur increasing competition between companies and producer nations to ensure their assets were not left “stranded” as demand gradually shifts from oil to cleaner forms of energy.
The result of this growing competition (price cutting)is likely to be “quite significant pressures to dampen long-run prices”, according to Spencer Dale, BP’s chief economist.
Mr Dale declined to provide detailed predictions on pricing. But his forecast raised doubts about the ability of producer nations to maintain market discipline in the long term and suggested that the $100-per-barrel prices reached before the 2014 crash are unlikely to return.
“Many low-cost producers have rationed supply with a view that if they do not produce a barrel today they can produce a barrel tomorrow,” Mr Dale said.
“I think it is increasingly likely that there will be technically recoverable oil reserves which will never be extracted and if I was the owner of one of those companies which owned that oil I would have every incentive to make sure it wasn’t mine [left in the ground].”
BP says pricing pressure is likely to come from the supply side, because of strong growth in US shale oil output, and the demand side as the rise of renewable energy, including electric vehicles, gradually slows growth in oil consumption.
Mr Dale said that higher-cost producer nations would face a battle to remain competitive against low-cost regions such as the US, Russia and the Middle East.
BP said that plentiful supply would help keep fossil fuels the dominant source of energy powering the world economy for decades to come, with oil, gas and coal projected to account for 75% of energy supply in 2035, down from 86% in 2015.
Non-fossil fuels are expected to account for half the projected 30% growth in energy demand over the next 20 years. Renewable energy was forecast to grow at an average annual rate of 7.6% to 2035, compared with just 0.7% for oil.
This was 1 percentage point higher than BP projected in last year’s outlook. Mr Dale said that a faster-than-expected shift from coal to wind and solar power in China had accounted for much of the increase. BP also raised its projection for the number of electric vehicles on the road from 1million today to 100 million in 2035, compared with a forecast of 70 million in last year’s outlook. However, this would still amount to only about 5% of the global car fleet.
Mr Dale cast doubt on the claim that said battery-powered cars would be be a “game changer” for energy markets. He said the doubt is because they would be offset by continued expansion in petrol-fuelled vehicles in emerging markets. “It is not Tesla drivers in the US, it is the 2 billion people in Asia who are moving into middle income and buying their first car that is driving oil demand,” he said.
BP’s projections suggest that oil demand is likely to peak around the mid-2040s but Mr Dale admitted that decline could come sooner if alternative technology advanced more quickly than expected.