Soaring oil production, weak demand eclipse geopolitics

HOUSTON, Oct. 23, 2014 /PRNewswire/ -- Despite nearly unprecedented geopolitical concerns, both US and global crude prices have decreased during the third quarter of 2014 due to a surge in domestic production and weak oil demand growth.

While the latest Department of Energy forecasts project continued increases in US oil production over the next 5-7 years, recent IEA estimates predict lower global oil demand growth than previously expected. As a result of this supply and demand spread, Brent prices during the third quarter dropped by approximately $14 per barrel while WTI prices lowered by around $12 per barrel. 

"The fact that crude prices declined while geopolitical concerns continue to rise speaks to the truly transformative potential and impact of increasing US crude production," said Deborah Byers, the Oil & Gas Leader for Ernst & Young LLP in the US. "Similarly, the lack of oil demand growth continued to be an influential story both globally and in the US."

Oil

During the past four years, US WTI benchmark oil prices have fluctuated up and down but have stayed within a fairly narrow range – between $95 -100 per barrel. In Q3 2014, both global and US crude prices weakened significantly as US supply increased and global oil demand remained fairly stagnant. Looking forward, the IEA expects oil demand growth of approximately 0.9% in 2014, compared to 3.6% in 2010. In 2015, the agency projects slightly higher growth.

Despite sluggish global demand, North American oil production continued to grow. Notably, three unconventional basins — the Eagle Ford, the Bakken and the Permian — accounted for about 90% of the nearly 3.8 million barrel per day increase since the beginning of 2007.

"A continuing slide in oil prices would however, threaten some of the expected growth in US oil production, as some cash-starved and higher-cost producers start to dial back their development plans," said Jim Franks, the Oil & Gas Advisory Leader at Ernst & Young LLP in the US. 

Source: EY analysis of data from the US Energy Information Administration

Gas

Although US natural gas prices rose on an extremely cold winter in late 2013 and early 2014, they have since fallen back to around $4 per million BTU primarily due to ample supply. Gas storage levels also evened out after reaching record seasonal lows in early 2014. While storage is still slightly lower than normal, US shale gas production continues to surge.

Notably, the boom in US gas production — primarily led by growth in the Northeast — has shifted the price spreads among US gas hubs. Historically, gas in the Northeast traded at a premium to Henry Hub. Now, those differentials have shifted and incentives are in place to move gas south. Despite this shift, there are still many gas infrastructure challenges to overcome in moving Marcellus shale gas to market along the East Coast.  

Regional differences in natural gas prices can be substantial. Notably, gas prices in both Europe and Asia – the top markets for US LNG – declined sharply over the summer. The Asian spot price dropped to $11 per million BTU during this time, but both Asian and European LNG prices have started to firm up more recently.

Source: EY calculations of data from Natural Gas Week and Thomson/Reuters

Meanwhile, more US LNG export capacity has been approved, and the costs of supplying LNG from the US Gulf Coast to Asia are expected to be approximately $7 per million BTU.

"Although Asian and European LNG prices are stabilizing, the rapid decrease during the summer highlighted the potential for price fluctuations in the market," Byers said. "It also emphasized the desirability of flexible LNG supply that can be shifted around to the most advantageous market."

Downstream

US refining margins remained reasonably strong during the third quarter while margins elsewhere declined on softening demand. Notional cracking margins on a New York Mercantile Exchange 3-2-1 basis averaged about $19 per barrel in Q3, slightly under the $21 per barrel average during 2014.

Oilfield services

Globally rig counts increased during the third quarter as the total number of US rigs improved slightly while both Canadian and international rig activity also rose steadily. Upstream spending also continued to increase though growth has softened slightly as operators react to surging costs and stagnant cash flow. Notably, the current US rig recovery has been largely led by oil-directed drilling and although Gulf of Mexico drilling is up slightly, it has been unpredictable in recent quarters.

Transactions

During the third quarter of 2014, global oil and gas transaction activity and value were higher although the number of deals decreased. The year-to-date deal value in 2014 is 50% higher than that during 2013, but deal volume is down more than 20% in the time period.

Notably, the US midstream segment has largely driven the recent strength in deal activity. Meanwhile, the number of upstream deals in both the US and Canada declined slightly though deal value is higher in 2014 compared to 2013.

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This release has been issued by Ernst & Young LLP, an EY member firm serving clients in the US.

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Contact:
Leslie Ellis
469.375.0247
[email protected]

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