Predicting oil trends was always a precarious job, and 2014 will not be any different in that regard. But the year ahead could bring developments with longer-term consequences for the global energy markets.
1. Energy revolution in North America shapes global markets
The energy boom in North America will continue to change global energy trends in 2014 and is set to reverse decades’ long trend of oil imports in the U.S. According to the International Energy Agency’s (IEA) latest Annual Energy Outlook report, the U.S. will become the biggest oil producer in the world by 2015.
However, U.S. shale producers will endure challenges in 2014. The decades-old ban on non-refined oil products export could produce a massive glut in oil supply, significantly slashing oil prices and inflicting considerable losses to the industry.
2. Security concerns plagues oil production in Iraq and Libya
The Middle East and North Africa will continue to interest oil analysts, primarily related to political insecurities in major producer countries such as Iraq and Libya. Although both countries are predicting larger oil outputs this year, much will depend on the political situation.
Iraqi government is looking to become the second largest OPEC producer after Saudi Arabia, with an increase of 1 million barrels per day (mb/d) in 2014, but most analysts are predicting production to rise by around 400 000 b/d to reach 2.8 mb/d. The key prerequisite for this scenario lies in the ability of the government to keep sectarian violence at bay, and establish a rational dialogue with the Kurdish and Sunni minorities in the North and the South of the country.
Libya is struggling to recover its pre-2011 oil production, and the real question is whether the government will be able to establish firm control over the country’s oil exports, primarily from the militia-controlled ports in the eastern province of Cyrenaica, and sustain production from its oilfields disrupted by continuous conflicts between the government, militias and tribal communities. As a consequence, the country is currently producing less than half of its 2012 production of 1.37 mb/d.
3. International agreement brings Iran back to the oil markets
The results of the Geneva negotiations between Iran and the international community could have a strong impact on the oil markets in the second half of 2014. The six-month interim agreement between P5+1 group (five members of the UN Security Council and Germany) and Iran, agreed in October, will come into force on 20 January and if successful will significantly increase Iran’s oil exports.
Iran is planning to increase its current oil output from around 2.5 mb/d to 4 mb/d, but 3-3.5 mb/d within six months of the lifting of sanctions is a more realistic goal. Yet, the political dialogue with Iran is still at an early stage and, considering the potential setbacks, it is difficult to forecast the final outcome.
4. OPEC is facing internal strains due to U.S. shale boom
The oil producers’ cartel will have to cope with new challenges in 2014. U.S. shale oil will continue to cut into the OPEC’s share of global oil production, which will reflect primarily through the decreased exports to the United States and additional downward pressure on oil prices.
In addition, Iranian and Iraqi plans to scale-up their oil production could produce a significant stir within the organisation and escalate tensions with Saudi Arabia. Iran’s recent pledge to increase its production for more than 1mb/d, regardless of the potential for the oil prices to plunge significantly did not go well with the cartel’s informal leader – Saudi Arabia.
At the December meeting in Vienna, the OPEC ministers agreed to keep the output at 30 mb/d for the first six months of 2014. The organisation expects to substitute plummeting exports to the US and accommodate increased production in Iraq and Libya with the forecasted rise in oil demands from Asian markets and China in particular. However, it is realistic to expect that the cartel will slash production at its next July meeting to prevent further deterioration in oil prices.
5. Rising oil demand will keep prices at bay
The U.S. Energy Information Agency predicts a 1.2 mb/d increase in 2014 global oil consumption, primarily led by China and other non-OECD countries, while the Paris-based International Energy Agency forecasted a stronger consumption growth in the United States and Europe, which will bring total global consumption to 92.4 mb/d in 2014.
Stronger demand will certainly relieve some of the downward pressures on oil prices, caused by forecasted increases in global supply, however the increased outbound from both the OPEC and non-OPEC suppliers will most likely bring prices slightly below their 2013 levels.
In their latest report, Deutsche Bank analysts forecasted the price of Brent to fall to $97.5 per barrel (bbl) and West Texas Intermediate crude to $88.75/bbl in 2014, compared to 2013 levels of $108/bbl and $97/bbl for Brent and WTI respectively.
