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Our market view - week 47

Released - Last updated

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OPEC cuts are needed to balance the market in 2013


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OIL
 
The global oil market is back in surplus, to a large extent due to the gains in US production. After a jump of 440,000 bpd in October, crude production is set to grow by 0.69 mbd or 12% in 2012. Total gain in US crude and liquids production for this year is estimated at 0.78 mbd. Continued increases in US and other non-OPEC oil supply will keep the market well supplied over the next few months.

Saudi Arabia has increased production to keep crude prices in check since mid-2011 and pumped at record levels this summer. The effort seems to have been achieved. Despite renewed clashes in the Gaza strip and the unsolved Iran issue, crude prices have not raced higher. Since the summer Saudi Arabia has been gradually lowering output, but still OECD oil stocks rose unseasonably in the third quarter according to the IEA. Weaker global economic growth and rising non-OPEC oil production has cut the demand for OPEC oil needed to balance the market to below the current production level. This could result in further cuts in Saudi output in the coming months.

In its 2012 World Energy Outlook released last week, IEA highlights the shifting foundations of the global energy system, with focus on how the new developments might affect global energy and climate trends. It is shown that economically viable energy efficiency measures can halve energy demand growth to 2035 (see figure below, ref. IEA).



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Barack Obama’s victory in the US presidential election suggests a renewed focus on the issue of climate change emphasizing reduced oil demand, carbon regulation and green energy. However, the Republican-controlled House of Representatives, federal courts and state governors still hold considerable influence over taxation and regulation of energy firms.

It is expected that the offshore leasing schedule and fuel economy standards will be made permanent. Rules on greenhouse gas emissions will be kept intact. Tighter rules are expected for oil and gas drilling and solar and wind are likely to get renewed focus. Coal companies expect more emissions restrictions and drillers anticipate less access to federal land. Shares of US coal companies traded down around 10% the day after the election.

NATURAL GAS

UK gas prices moved higher on supply issues last week. Norwegian production problems and the postponement of a planned outage supported prices, despite unseasonably low demand due to warm weather and higher LNG supply as more vessels arrive at British terminals. The global LNG balance may tighten due to supply issues and higher demand from Asia, particularly Korea.

In the US, low gas prices caused by the shale gas boom are pushing gas use to new highs at the expense of coal. From January to August, gas use in the US power sector increased by 26%, to 184 bcm.



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Picture: US gas use in power generation (EIA data)
Updated