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Oil price could take 15 years to recover But, EIA’s Adam Sieminski tells AOGA, more likely problem in world production will cause price to jump back up in next 5-8 years Kristen Nelson Petroleum News
When will the oil price recover is a topic of great interest in Alaska and Adam Sieminski, administrator of the U.S. Energy Information Administration, offered two thoughts on that issue when he spoke at the Alaska Oil and Gas Association’s annual luncheon May 28 in Anchorage.
He cautioned, however, that he’s been trying to predict oil prices for his entire career - more than 40 years - and said it’s a really hard thing to do.
Looking mathematically at what the options markets and the West Texas Intermediate contract say about the probability that the price could be higher or lower than the $60 it’s been trading at recently reflects the views of the market - the refineries, airlines, hedge funds and others who participate in options markets, Sieminski said, referring to a chart EIA’s May Short-Term Energy Outlook which shows 2013-2016.
At a 95 percent confidence level, the price could be as low as $30 or as high as $100 a barrel, he said. While that is a wide range, “a year ago, when oil was close to $100, the options market said that to get that 95 percent confidence level you actually had to have prices down as low as $60, which is where we ended up,” so while a lot of people think no one called the drop in oil prices, “the options market actually reflected that oil prices could go down.”
Sieminski said he’s lived through “six huge downturns in the oil market,” which were followed by six upturns, “so I don’t think that we’re going to stay down here forever.”
Mathematics v. reality Current drilling numbers show that production is dropping in the major shale oil fields, he said. “So the drop in oil prices is actually having an effect on drilling and on production and that ultimately will rebalance the market.”
In 2014, production was growing by more than 1.5 million barrels per day in North America, Sieminski said, while world oil demand was only increasing by about 1 million bpd, creating an imbalance.
“In 2015 and 2016, EIA thinks those numbers will be down closer to half a million barrels a day in growth,” and with global demand still growing at about 1 million barrels a day, “markets will eventually rebalance” and are projected to be in much better shape by the end of 2016 than they are now, “relative to supply and demand” coming closer.
Inventories and spare production capacity are also in play, he said, with inventories in the developed countries very high, which means “it wouldn’t take a lot to actually force prices down even lower.”
But there is also “very little spare producing capacity in the world,” he said, perhaps 1.5 million to 2 million bpd, most of that in Saudi Arabia. So if there were a problem with production - he cited Venezuela as a possibility - the Saudis would have to increase production and then there wouldn’t be any spare capacity left.
Those factors, he said, are examples of why there are big moves up and down in oil price.
As to when oil would get back to $100 a barrel, modeling would put that at 2029 or 2030, Sieminski said, noting that those numbers allow for inflation, so in real dollars, sometime in the late 2020s.
But, he said, “it never happens that way. And what is really likely to happen is sometime in the next five years ... or eight years, there’s going to be some problem in the world and oil prices are going to jump back up again. I’ve seen it six times and I expect to see it a seventh,” Sieminski said.
Alaska impact EIA looks at three cases - a reference case, a low oil price case and a high oil and gas resources case.
In the reference case U.S. production peaks at some 11 million bpd and gradually drops back to a bit less than 10 million bpd, while in the high oil resources case it gets up closer to 17 million bpd. In the low oil price case, with the price steady at some $70 to $75 per barrel over the next 25 years, oil production peaks and then begins to taper off.
In the high oil-gas resource case Alaska production holds steady at 500,000 bpd, but in the low oil price case throughput on the trans-Alaska oil pipeline “basically stops sometime in the next decade” due to “mechanical, engineering issues associated with pumping oil through that pipeline.” Sieminski said EIA believes that at some 300,000 bpd “the pumping system just won’t work” to move oil through the pipeline and the line would have to be shut down.
EIA also looked at the LNG project, he said, and in the reference case model “it’s economic to build the Alaska LNG” project and gas starts flowing about 2025-26. In the other cases, the Alaska LNG project isn’t built.
In the high oil and gas resource case, the inexpensive Lower 48 shale gas “basically outcompetes the gas pipeline system in Alaska” and in the low-price case, “the market itself makes it very difficult for the investment to take place” because of low oil-linked prices in the Asian market impacting the netback in Alaska.
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