Oil price to remain below 50 dollar a barrel over 2016

08 March 2016 Consultancy.uk

Oil-exporting country predictions of the price of oil has been way off in recent years, as changing dynamics within the industry as well as global forces begin to reshape the industry. While predictions from oil producing countries have enjoyed a poor track record, institutional forecasts have improved. Oversupply remains a key concern, however, with the low oil price (<$50) making almost half of US production unfeasible.

The price of oil has been making headlines since its massive – and now sustained – plummet from $115 a barrel heights, to sub-$30 lows at the end of last year. The effects of the low price has a broad range of implications; oil producing countries have seen significant falls in revenues, while oil dependent countries are enjoying respite. Energy companies, with many dependent on oil prices above a certain level for sustainable operations, are in trouble – the US has already shed more than 250,000 jobs from the industry, while a wave of consolidation is predicted by some for the coming year. Consumers are enjoying a considerable drop in the cost of living, which, however, has a deflationary effect – forcing changes in monetary policy in an already fragile environment.

While the oil price averaged $49 a barrel in 2015, correctly predicating its future movements has become a priority for countries and businesses whose existence is dependent on the liquid. In a new report from Roland Berger, titled ‘2016 oil price forecast: who predicts best?’, the consultancy firm sought to identify the prediction trend made by countries as well as institutions, to gauge the direction of the oil price in the coming term – as well as consider the key factors that may come to influence its movements.

absolute year-ahead oil price forecasting error 2015

Getting it wrong
Analysis of the predictions made by oil producing countries, in their yearly budgets, found that the top three predicting countries; Nigeria, Saudi Arabia and Mexico, had an accuracy 96% between 1999 and 2014. While three large energy institutions, the NYMEX, EIA, and IEA, had an accuracy of 53%.

Recent years, and in particular 2015, have seen considerable changes to the energy market – which has seen the tables turn on predictability – and since 2010 the institutions have tended to be more accurate. In 2015, every country (including the top three) were well above the actual price of $49 a barrel. Nigeria was 76% above the mark at $86 a barrel, while Saudi Arabia came in at $90 a barrel. Mexico’s prediction was the furthest off, out by 126% at $110 a barrel. The accuracy of the institutions’ was out by between 41% and 61%, with the closest prediction $69 a barrel.

Crude oil production per country and us exports 2007-2015

US production
A number of factors have influenced the market in recent years. The USA has, since the shale gas boom, seen its production explode. Since producing 8 million barrels per day in 2009, production has ramped up to 14 million in 2015 – the country becoming the largest producer 2012 onward. Following the boom in production by the US, there also is a significant increase in the export of petroleum products from the country, up from just under 2 million barrels a day in 2007 to around 5 million in 2015.  Recent changes have further added to global crude supply, with US companies now permitted to sell its crude on the market. 

Global supply and demand of oil and net differential

Oversupplied
The large increase in production by the US, as well as changes in the market dynamics as particularly Saudi Arabia increased supply in recent years, have seen a large spike in supply while demand has remained relatively stable – on average there is an oversupply of $1.8 million barrels per day.

Past drops in oil price could be attributed to recessions, where demand dropped off while supply remained stable; instances include the 1998 Asian financial crisis, 2001 tech bubble burst and the 2009 global financial crisis. The current drop of the oil price, starting 2014, is not caused by a recession, however, but by oversupply - causing the oil price to reach its lowest level since 13 years. The causes are similar to the 1986 oil shock, which followed from a large increase in OPEC production, with oversupply pushing down prices to some of the lowest seen in almost a decade.

2015 WTI price forecasts

Predicting the future
Predictions for the coming year are relatively variable, but place the average value of oil close to $50 a barrel. The countries that historically were the most accurate predict prices equal to, or below, between $61 and $48 a barrel, with the average across all oil producing countries coming in at between $38 and $53 a barrel. The institutions predict that the average price for oil in 2016 will be around $46.

2015 US crude supply curve projection

Controlling the future
According to the consultancy, a number of factors will bear on the prediction for the coming year. One major factor is related to production in the US. The low oil price is placing considerable pressure on the country’s domestic oil industry, with 50% of production not viable below $50 a barrel. If production in a range of types and geographies slows or halts, the effect may be that more than 4 million barrels a day will be slashed from the global market place, further aligning supply and demand. However, with the cost of OPEC production still below the cost of oil, and continued stagnant demand – the current low oil price environment may be here to stay for at least the coming year. 

OPEC's move to continue releasing its oil, resulting in oversupply, is also likely to further affect all oil producing countries – with the likes of Russia, Saudi Arabia and Venezuela already seeing significant fiscal contractions following the massive price drop. Saudi Arabia’s continued high supply rate however, is likely a means of controlling its market share in the face of increased US supply – forcing much of that supply off the market to be replaced by its own cheap, but still profitable, supply. Yet the strain on Saudi Arabia’s budget may – in the coming year – force its hand to lower supply, which could result in pricier oil.

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WEF finds no progress made on greening economy

01 April 2019 Consultancy.uk

The reports of two influential bodies, in the space of a day, have warned that no progress is being made to prevent major climate change. The World Economic Forum has warned that greening of the global energy transition has stagnated over last five years, while the International Energy Agency has confirmed coal use rose again last year.

The position of the Academies of Science from 80 countries, plus a majority of scientific organisations that study climate science, is that humans are causing rapid climate change – often referred to as global warming. Roughly 95% of active climate researchers publishing climate papers endorse the consensus position that since the industrial revolution, the boom in carbon emissions from fossil fuel powered human activity has heavily impacted the planet, with rising levels of CO2 and other greenhouse gases trapping heat from the sun causing global temperatures to rise – something which will have catastrophic results in the near future.

Despite the steadfast consensus among the scientific community on the matter, however, there has been little to no meaningful action to avert disaster. In fact, while the signing of the Paris Accord was met with great excitement, since it came into force, global carbon dioxide emissions have continued to rise. Today, they sit at their highest levels yet, after a strong economy and extreme weather stoked a surge in energy demand last year.WEF finds no progress made on greening economyAccording to the world’s energy watchdog, the Paris-based International Energy Agency (IEA), energy spiked by 2.3% in 2018 – the biggest leap since 2010 – with that demand largely being met with fossil fuels. As a result, global emissions of carbon dioxide hit the record high of 33 billion tonnes in 2018, a rise of 1.7% on 2017’s figures. Commenting on the findings, IEA chief Fatih Birol said the rise in energy demand was “exceptional” and a “surprise for many.”

Birol added, “We have seen an extraordinary increase in global energy demand in 2018, growing at its fastest pace this decade. Looking at the global economy in 2019, it will be rather a surprise to see the same level of growth as 2018.”

The suggestion from Birol that 2018 is likely to be an anomaly which will not be seen again is strange, considering the added strain which the boom in emissions will place on the environment. To suggest that heightened energy demand was driven by extreme weather – which is increasingly difficult to claim is unrelated to man-made climate change – and then to suggest that such a thing is unlikely to occur any time soon in spite of emissions having increased seems contradictory.

Regardless of this, the bad news was further compounded within hours of the IEA’s release. A report from the World Economic Forum released on the same day concluded that the world's energy systems have not become any greener in the last five years. Despite the agreement of global climate targets, falling green power costs, and mounting public and business concern over the catastrophic impacts runaway climate change could wreak, the WEF’s damning assessment warned that little to no progress has been made on making energy systems more environmentally sustainable since 2014.

Coal is the largest hindrance of change on this front, according to the report. Recent years have seen improvements in energy access and security, but far too many nations remain dependent on coal power for the new energy systems to have made any environmental gains. At the same time, major economies have failed to decrease or even slow the amount of energy they use per unit of GDP, leaving smaller actors who have made changes micturating into a gale. Change on the part of the world’s largest economies is therefore crucial to driving the development of a greener, more efficient global economy, the WEF concluded.

Commenting on the findings, Roberto Bocca, leader of the WEF's future of energy and materials division, said urgent action is now needed to move toward decarbonisation. He added, "We need a future where energy is affordable, sustainable and accessible to all. Solid progress in bringing energy within the reach of more and more people is not enough to mask wider failures, which are already having an impact on our climate and on our societies."

The news comes even as sustainability continues to be talked about as a ‘top agenda item’ at the majority of the world’s largest corporations. While 85% say that it will be more important still in another five years, it is clear that the majority of the world’s most powerful businesses are failing to walk the talk on the matter, regardless of what governments do.