Iran worries keep prices high, despite rising non-OPEC crude supply

HOUSTON, April 18, 2012  /PRNewswire/ -- Increased oil production in the US and other non-OPEC countries, which more than offsets increases in global demand, is keeping pressure on OPEC to limit crude output. Increased supply typically creates lower oil prices, but today's new supply is being outweighed by anticipated supply interruption from Iran and other smaller sources including: Syria, Yemen, the Sudans, and the North Sea. These supply worries are further compounded by continuing fairly low levels of OPEC spare capacity, yielding oil prices of around $120/bbl.

After decades of rising demand and declining supply, the US is consuming less and producing more, lowering its reliance on foreign sources of crude. Other areas of significant production growth include South America, Russia and Canada.

(Chart: http://photos.prnewswire.com/prnh/20120418/NY89729 )

"The advent of increased domestic supply is certainly positive for the US economy and energy security," said Marcela Donadio, Americas Oil and Gas Leader, Ernst & Young LLP.  "Importing less oil and gas creates a more positive trade balance for the US, and domestic production stimulates job growth, local business revenues and tax receipts, along with other positive economic impacts."

Oil
In North America, growth in tight-oil production from the Bakken shale region, coupled with increases in natural gas liquids production and Canadian crude supply, has transformed the regional supply/demand picture. While the US benchmark crude WTI has become disconnected from globally-traded crudes, global crude prices are still high as a result of geopolitical supply uncertainty. Oil demand in the US and other developed economies in 2012 is expected to continue to decline, but on a global basis will rise by a modest 0.9%, led by the emerging economies.

Gas
US natural gas production continues to rise, but prices languish. Despite shifts away from dry gas production to oil development and to more liquids-rich gas plays, "associated gas" production continues to be strong. With a very warm winter, surging supplies have kept natural gas storage volumes at market-crushing levels. Power generation is the fuel's brightest prospect. Even as electricity demand has been flat-to-declining, natural gas has gained market share in the sector, as low gas prices have encouraged fuel-switching. In recent months, natural gas has been increasingly displacing coal for power generation.

The North American shale gas "revolution" presents some cause for concern, warned Donadio. "We're at a critical point in the shale gas boom where we may start to see some of the small to mid-size players succumb to sustained depressed prices. How much longer can companies continue to produce and sell such a low-priced commodity and keep the lights on?"

Downstream
Refining margins have gotten a boost from the relatively large seasonal maintenance turn-around schedules. After a banner year in 2011 due to logistical constraints and significant crude price advantages, US Midcontinent refineries enjoyed yet another surge in margins. But two upcoming capacity developments – the Seaway pipeline reversal and the planned Keystone extension – should narrow some of the margin differentials over the next few years. New capacity from the Shell and Saudi Aramco venture in Port Arthur, TX, will put downward pressure on US Gulf Coast margins, but the biggest downstream issue going forward will be how the East Coast product markets will be affected by the looming refinery closures.

Oilfield services
Rig counts are broadly holding steady across all geographies – with Africa and the Middle East showing the strongest growth. The total US rig count is near its last peak, reached in fall 2008, but the structure of the rig market is notably different. At the previous peak, gas-directed drilling accounted for about 80% of all rig activity; more recently, gas-directed drilling was only about 30% of the US total.

Global upstream spending is increasing, but decelerating with forecasted growth of 10 to 15% in 2012. OFS cost pressures have moderated somewhat, but game changers for oilfield services will be the next generation of oilfield technology, particularly those focused on reducing costs.  

Transactions
Oil and gas transaction activity has experienced ten reasonably-strong quarters in a row, but activity slowed in the first quarter of 2012. The quarter saw weakened transaction activity globally, with an unclear North American trend. EMEIA activity was down, but Asia-Pacific activity was up. Activity in the Americas continues however to dominate the global totals.

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SOURCE Ernst & Young