The Power Play: Which way oil prices go in 2014
By Peter Fallon, energy stocks specialist.
Rising U.S. crude production from unconventional shale oil fields helped stabilize global oil prices last year. 2014 should see shale oil production rise even more.
At face value, it would seem as though West Texas Intermediate (WTI) crude would be even cheaper in 2014. By extension, so would gasoline prices.
As we’ll see below, that isn’t going to be the case. Don’t believe me? Read on.
OPEC and Company
Make no mistake: the Organization of Petroleum Exporting Countries (OPEC) controls global oil supply. However, OPEC has its share of problems.
Many of its members, even though they have specific crude production limits, cheat. There are no “OPEC oil police” to check on any given country’s adherence to its quota. The result is they produce more.
Right now though, violence in Iraq is shedding doubt on Iraq’s 2014 production potential. It’s the second-largest OPEC producer, Saudi Arabia being the first. Iraq currently produces about 3.2 million barrels per day (Bpd).
Venezuela’s production dropped 235,000 Bpd this past December. Its daily output is now 2.45 million Bpd.
Another hotspot is Libya. It to is an OPEC member. Hopes ran high that the country would return to pre-civil war levels quickly.
They did but only for a few months. The rebels quickly became disillusioned with the management of Libya’s economic lifeblood.
Out of frustration, rebel groups began targeting pipelines, export terminals and refineries. Many groups are blockading a number of key Libyan oil-exporting ports. As a result, Libya’s current oil exports have dropped from 1.6 million Bpd to 110,000 Bpd.
What About U.S. Crude Prices?
What does all this have to do with U.S. crude oil prices? Plenty. Right now, there is a ban against exporting crude in the U.S.
However, there is no ban against exporting refined products like gasoline, diesel fuel and jet fuel. Exports of refined products are at record levels.
Most refineries in the U.S. can’t handle the light, sweet crude produced by U.S. oil shale fields. It ‘s mixed with heavier crude in order to run through the refining process.
In 2013, U.S. crude production increased by 1 million Bpd. That was more than all of the rest of the increases in the world… combined.
Total U.S. crude production reached its highest level in over 24 years. 2013’s production increase was the largest one in U.S. history.
For the first time in nearly two decades, crude production actually exceeded crude imports for several weeks. A number of new pipelines came online in 2013 as well.
These pipelines enabled crude from the Eagle Ford, Permian and the Bakken oil shale fields to reach refineries more easily. The reversal of the Seaway crude pipeline increased the availability of more than 400,000 Bpd to refineries in the Houston, Texas area. Check out the map below, courtesy of the Seaway Crude Pipeline Company.
Right now, construction of a second pipeline is underway alongside the existing 30-inch line. By the middle of 2014, the Seaway’s capacity will more than double to 850,000 Bpd.
So Why Did WTI Crude Average $98 a Barrel for 2013?
The black goo was actually up 4% from 2012. 2013’s average price was the highest since 2008.
The reason WTI crude stayed high was that demand for it actually increased from the refineries that were able to blend it with the higher priced Brent crude.
That meant U.S. imports of Brent decreased, and supplies of Brent increased for the rest of the world. Look at the graph below, courtesy of the Energy Information Administration (EIA).
Rising WTI crude production had the effect of stabilizing the global price for oil. If Congress allows crude exports, WTI and Brent prices will nearly converge.
That will send WTI prices higher. At the same time, Brent prices should drop, with the two meeting somewhere at $105 per barrel.
However, congressional approval of crude exports is far from a done deal. Many in Congress feel we should keep our crude oil here.
Regardless of congressional action, demand for crude on a global basis remains high. Last year China accounted for nearly 33% of global crude demand growth.
It now has surpassed the United States as the largest importer of crude on the planet. China and India’s growing demand for crude will keep upward pressure on Brent.
Together they will sop up any excess supply. However, there’s a problem. Look at the graph below, again courtesy of the EIA.
The above graph depicts just how grave the global oil supply story is. Where are China and India going to get their oil?
Good question, but it’s easy to see why Brent and WTI will both be higher in 2014. The bottom line is that just because we have more oil doesn’t mean prices will drop. In fact, for the reasons listed above, they’ll likely do just the opposite this year.
Profitably yours,
Peter Fallon.
