ConocoPhillps’ chief economist sees gradual market recovery
HOUSTON -- The recovery of the global oil market from sharply lower oil prices will be gradual, and it will be driven mostly by a supply response, said ConocoPhillips Chief Economist Marianne Kah. Her comments came during a presentation to The 5th Norwegian Finance Day, held Wednesday by the Norwegian Consulate General at the Federal Reserve Bank in Houston.
There were a number of drivers that brought about the free-fall of crude prices, said Kah. These include slowing economic growth, particularly in China; a warm start to the North American winter; rising U.S. tight oil production, a temporary return of Libyan oil production; and last, but certainly not least, OPEC’s decision at its November 2014 meeting to not function as a swing producer.
“We’ve had weak global oil fundamentals,” added Kah. “And (in terms of balancing supply with demand), the real question is whether Cushing (Okla.) storage will fill up faster than growth in (U.S.) oil production slows down. Exceptionally cold weather in January and February has helped to increase demand, at least some.”
Kah noted that global oil demand growth over the last half-dozen years has not been as robust as it could have been, due to the fact that “we’ve seen a very moderate global recovery from the 2008-2009 financial crisis. You have to remember that Chinese economic growth and diesel demand growth were the primary drivers of high oil prices in the mid-2000s.”
Another factor playing into the oil price equation, said Kah, is per-capita usage of oil in Western industrialized countries. “There is no doubt that the world is less oil-intensive these days,” she explained. “If the world had the same oil intensity today, that it had in 1985, then we would have oil demand of 135 MMbpd instead of 90 MMbpd.”
Examining the U.S. market specifically, Kah pointed out that U.S. liquids production has returned to levels not seen since 1972, which was the year before the Arab Oil Embargo. “And I think U.S. oil production will continue to grow some yet, despite low prices. You have to look at how productivitiy improvements in the field have improved economics. A lot of R&D learning has gone on in the shales, and it will continue to go on. So, the threshold for economic shale production continues to go lower.”
“Nevertheless, a lot of companies are going to have to stop drilling,” added Kah, “because they simply don’t have the cash. Over the last few years, oil companies, overall, have been investing 120% of cash flow, so they’ve taken on a lot of debt. Thus, activity will go lower. Now, although we will see a dip in activity at $50/bbl, as productivity gains kick in, we’ll eventually see output start to grow again. Another factor to consider is that there will be less infill drilling, which will cause mature areas to decline faster. In addition, industry “cost deflation,” where service companies dramatically lower the prices that they charge, will play a role, too.”
On the natural gas front, “growth in the Marcellus and Utica shales (of the northeastern U.S.) is crowding out most other natural gas production growth,” observed Kah. “The Marcellus has proved to be much more productive than originally thought.” She noted that break-even costs for natural gas production have come down, with the highest levels being about $5/MMbtu, and some plays, like the Rockies and Mid-continent regions, falling to $2.50/MMbtu on the low side.
Internationally, Kah said that European natural gas demand has seen a 20% decline since 2010. This includes a 35% decline in gas usage for power generation, some of which she blamed on policies set by individual European governments, particularly Germany. Kah also warned of an increasing risk of LNG oversupply, due to accelerated development of gas resources in key countries. She said this oversupply would be due first to supplies Australia and later from U.S. sources.
