May 2015

Energy issues

Vexing questions
William J. Pike / World Oil

In all my time in the oil and gas industry, I don’t think I have experienced a stretch in which the industry faced so many questions at one time. Many of the questions are vexing. The answers to them, difficult though they may be, will shape the industry for generations to come.

The most important, of course, is the price of oil. Pundits and industry leaders are having a field day with this one. Either the upturn is just around the corner, or it’s a couple of years away, or we may never get back to $100/bbl oil. I was attempting to put together a synopsis of some of the more interesting projections when I found that it had already been done by Bloomberg Business, and others.

Below is Bloomberg’s list compiled in mid-February, together with observations from the recent CERAWeek and MoneyMorning:

  • Oil will probably continue to decline to as low as $30/bbl, according to Gary Cohn, president of Goldman Sachs Group Inc. “We’re probably in the lower, longer view,” said Cohn.
  • Oil has the potential to reach $200/bbl from a lack of investment in new supply, said OPEC Secretary General Abdell El-Badri. He gave no time frame for reaching that price.
  • Shale oil will soon be needed to make up for production declines around the world, pushing U.S. prices as high as $65/bbl, said the head of Astenbeck Capital Management in early February.
  • In a Bloomberg News survey of analysts and traders, 12 of 32 respondents predicted that oil futures would decline early in the year, while 10 forecast an increase. The remaining 10 respondents may have gone to a tavern to think it over.
  • “We don’t think we have seen the bottom yet,” said Giovanni Staunovo, a commodities analyst at UBS in Zurich.
  • “We are establishing a bottom,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “In the long run, probably $60 is going to be your pivot point.”
  • Oil could fall as low as $30, because supply surpluses won’t disappear overnight said Barclay analyst Miswin Mahesh.
  • “The fundamental supply and demand does remind me of 1986 a bit, where we could go into a period in this decade of lower prices” said BP CEO Bob Dudley. Prices may stay below $60 for as long as three years, he said. “It will be a long time before we see $100 again.”
  • The recent surge in oil prices is just a head fake, and oil as cheap as $20/bbl may soon be the way, said Citigroup analyst Edward Morse. He predicted a fourth-quarter rebound to around $75.
  • Beyond the predictions noted in Bloomberg Business, many other opinions are floating around out there. Noting the continued increase in shale production during February, MoneyMorning predicted, in a piece posted on NASDAQ, that oil prices will rise significantly by August. Assuming there are no new geopolitical “wild cards” that cause prices to spike higher, MoneyMorning believed that oil prices will rise to about $58 in New York and $65 in London.
  • Speaking at CERAweek, ConocoPhillips CEO Ryan Lance described the market as being in a new era of volatility. “If they get a price signal that a high price is coming back … you’ll see more supply come back, and that certainly has the opportunity to exacerbate the problem, depending on where the demand is at,” the Houston Chronicle reported Lance as saying. Lance put the upside potential at $80 to $90 over the next few years, but noted that a $50-to-$60 scenario is a good chance also, given the volatility.

Speaking to CNN, Michael Loewen, a Toronto-based commodity strategist at TD Securities, the Canadian investment bank, described projecting oil prices as “both a science and an art.” On the science side, analysts cull data from myriad sources to build models for supply and demand. “But you have to assign a probability to certain factors actually happening, and so that’s the art side,” he says. “You have to have a very good handle on both sides, to be worth your salt.”

While I agree with Loewen, from the opinions above it becomes clear—at least to me—that, in addition to science and art, one would do well to come to the prediction party equipped with a Ouija Board or accompanied by a mystic with a crystal ball. But Loewen is also a realist. “To say analysts got it wrong is like saying, ‘Well, you didn’t win the lottery last year, so what’s up with that?’” he says. “Analysts will always be wrong; they’ll be wrong 49% of the time.”

So there’s the message in this column. Take any projection you like, and you can be fairly sure it is 51% correct. That’s better than the odds at a casino so go ahead and make that bet. It’s probably better than betting on the answers to the other questions that plague the industry today, such as:

  • Will removal of export bans help the U.S. oil and gas industry, and the nation?
  • Will water disposal and fracing create the mother of all earthquakes, and end the business?
  • Will recently released new regulations for offshore operations in U.S. West and East Coast waters stymie operations there?
  • Will lights from flaring and rigs that are visible from space attract alien invasions?

Feel free to answer these questions, but bear in mind that your chances of getting them right are less than your chances of accurately predicting the oil price. wo-box_blue.gif

About the Authors
William J. Pike
World Oil
William J. Pike has 47 years’ experience in the upstream oil and gas industry, and serves as Chairman of the World Oil Editorial Advisory Board.
Connect with World Oil
Connect with World Oil, the upstream industry's most trusted source of forecast data, industry trends, and insights into operational and technological advances.