A new report released by Bernstein Research, a widely recognized Wall Street sell-side research firm, has surprised analysts and investors with its claim that global oil prices are likely to rise sharply from 2015 and move above $150 a barrel in 2020.
The report, “Global Oil Prices: At ‘Base Camp’ Before the Final Ascent,” surprised many who believe that, with a rapidly-expanding North American and global oil industry, rising supplies of unconventional oil will result in price moderation moving forward.
The 180-page report forecasts that Brent crude will rise from an average of $113 in 2015 to $158 in 2020, with West Texas Intermediate (WTI) crude priced at a $5 discount.
Going against the curve
Those forecasts are in stark contrast to the Brent forward futures curve, which is presently set at a marked discount to today’s price levels. On Monday, Brent futures traded at $98.95 a barrel in September 2015, falling gradually to $86.66 a barrel in September 2019.
“A new thesis in energy markets is that unconventional sources of oil supply will soon outweigh global demand growth, driving oil prices lower — we disagree,” Reuters quoted from the report.
The Bernstein Research report argues that while US shale oil and Canadian oil sands have successfully jumpstarted the North American oil sector, new supplies are still insufficient to meet emerging market demand growth. It says that by 2015, shale oil is forecast to constitute just 3.2 percent of global supply, up from current levels of 1.5 percent.
“Beginning of an oil renaissance”
Arguing against the report’s findings, Bloomberg reported that oil production from the part of the Bakken shale formation in North Dakota was at 609,580 barrels per day (bpd) in July, nearly double the 360,820 bpd produced in the same month in 2011. Christian O’Neill, a Bloomberg Industries senior analyst for oil and gas, described the successes of shale plays as “the beginning of an oil renaissance in North America.”
Also countering the report’s claims is US Energy Information Administration data that shows that increased production out of the Bakken shale formations in July helped US oil output rise to its highest level in 13 years.
Despite this, the Bernstein report notes, “[e]merging market demand is still robust, rising with higher wealth and mobility; in developed markets the role of fuel economy in demand destruction is overstated; conventional non-OPEC supply is increasingly mature; OPEC capacity growth will likely lag its required rate.”
The contrarian, but bullish, forecast is bound to give investors food for thought, especially given the rebound in global crude prices over the past six months, and the subsequent rush by firms to secure economically-viable oil plays. Joining the race, some natural gas exploration companies have rebalanced their commodity mix more towards oil — and the superior economics afforded by that commodity — creating a more competitive market environment.
The report’s remarks are also likely to cause a rethink among North American oil and gas investors, especially considering plans outlined by Republican presidential hopeful Mitt Romney. Romney is aiming to boost American domestic oil, coal and natural gas output in an attempt to achieve US energy independence by 2020. In a recent campaign whitepaper, Romney outlined an energy vision built around two main points: North American domestic oil and domestic natural gas.
Production costs to maintain high oil prices
Bernstein notes that the inflated production costs currently being experienced by the oil sector will assist in supporting higher prices. The firm estimates the marginal cost of supply — the cost of production for most new oil fields — was at $92 a barrel in 2011; when prices fall below that level, output falls. Canadian oil sands producers need $100 a barrel to achieve an adequate return on capital, according to Bernstein.
Yet despite the report’s forecast that prices are set for an upward trajectory, current boosts in supply are likely to weigh down on the market. Commerzbank analyst Carsten Fritsch told Gulf Times, “[t]he market will … remain oversupplied in the coming quarters if OPEC production stays at its current level of more than 31 million bpd.”
Meanwhile, Raymond James also lowered its forecasts for 2013 to $80 per barrel for Brent and $65 per barrel for WTI. “With demand expected to decline at the tail end of U.S. and EU driving season in September, we should see a decline in oil prices. If it continues to rise, the possibility of release of strategic crude reserves by the United States is high,” said Natixis analyst Abhishek Deshpande.
Regardless of whose predictions are proven accurate, it seems crude’s return to the $100 per barrel level has made oil exploration and production firms a prime investor focus once again. Many will be on the hunt for companies able to take advantage of a price rise such as the one put forward by Bernstein. They will also be looking to invest in firms able to reign in production costs to offset losses when prices fall.
While the report’s estimates seem bullish given current production increases, the fact remains that crude demand is on the rise and there will be plenty of dollars available for those companies able to source and produce crude at optimal price levels.