Fitch Ratings: Iran, Venezuela and US Shale Output To Drive Oil Prices
Iranian and Venezuelan oil production levels, along with the pace of US shale growth, will drive oil prices in the medium term, Fitch Ratings says. Supply constraints at a time of steadily growing demand are leading the Brent price to spike above USD80/bbl. We rate oil and gas (O&G) producers on a through-the-cycle basis using fairly conservative price assumptions, but there is a potential for a moderate upside revision of these assumptions in the next two months. Upcoming US sanctions against Iran already caused the country’s output to drop by 350 thousand barrels per day (mbpd) in September. We believe at least 1 million barrels per day (mmbpd) may be at risk unless sanction waivers and exemptions remove pressure to cut production further. Venezuelan output in September was 700 mbpd below its OPEC quota as the economic and political crisis continues to cripple the country’s oil industry. We forecast that production declines in Iran and Venezuela may reach 2 mmbpd, or more. This is about the same as our estimate of maximum global spare capacity at the beginning of the year, mostly in OPEC countries and Russia. Prices might come down if OPEC+ producers manage to make up for the lost volumes. US shale growth could help the oil market revert to a more balanced state in 2019 with prices moderating. However, the very limited spare capacity left in the market is likely to continue to influence prices. We cannot rule out an alternative scenario where oil prices keep rising or stabilise in the USD80-90/bbl range should OPEC and Russia be unable to sustainably offset the production fall. The pace of US shale growth will be a significant factor in the oil price level. The US Energy Information Administration (EIA) expects US crude production, including natural gas liquids, to grow by around 2 mmbpd in 2018, which should exceed global demand growth. However, infrastructural limitations will continue to limit by how much the US production could grow every year. There are several large pipelines with expected completion dates in 2019 and 2020 that will somewhat elevate constraints. Oil demand is expected to remain strong in the short term but is more uncertain over the next two to three years. Global economic expansion at the beginning of the year has spurred the demand. However, protectionist US trade policies have now reached the point where they are materially affecting the global growth outlook. High oil prices may also start to weigh on demand. The credit profiles of deeply high-yield O&G producers are likely to benefit from the current pricing environment. This is due their liquidity positions often being stretched and leverage high, so additional cash flows could remove liquidity pressure and reduce debt loads. Larger integrated producers usually match increased cash flow from higher prices by increasing returns to shareholders, so the impact on their credit standing is more limited. We expect industry cost inflation to pick up if high prices are sustained. So far, most large players have based their budgets on the USD50-60 price range. Plans may change if oil prices remain high. US LNG Cannot Compete Under Any Circumstances With Russia’s Piped Gas – Prof US Senators Chris Murphy and Ron Johnson introduced a bill aimed at combating what they called “malign Russian influence” in the EU and ensure European energy security. Speaking to Radio Sputnik, Dr. Mamdouh Salameh, international oil economist and professor of energy economics at the ESCP Europe Business School, shared his views on the issue. Sputnik: In your view, how likely is the US Senate to pass this proposed European Energy Security and Diversification Act? Mamdouh Salameh: Given the growing anti-Russian atmosphere in the United States Congress and the United States’ attempts to challenge Russia’s emergence as the energy super power of the world and also given US self-interest and Russia’s dominance in the gas market in the European Union, there is a reasonable probability that the proposed European Energy Security and Diversification Act will be approved by the US Senate. Sputnik: How economically sound is this really? You’ve mentioned a lot of political reasons for wanting to pass this — is it an economically sound move to pass this kind of thing? Mamdouh Salameh: Well, the proposed legislation is purely self-interest on the part of the United States, to help itself rather than help the European Union to diversify its energy sources. The United States wants to replace Russian piped natural gas to the European Union with the United States’ LNG (liquefied natural gas) exports. Despite the EU’s attempts to diversify energy sources, primarily natural gas, including the Southern Gas Corridor, which will bring gas [of] 10 billion cubic meters annually of Caspian gas from Azerbaijan to Turkey and the EU, it will still be a fraction of Russian supplies amounting currently to 224 billion cubic meters annually, or almost 40 percent of total EU demand. And it is on the rise. To add salt to injury, the Southern Gas Corridor will end up transmitting Russian gas to the EU through Turkish Stream. So, for Russia it is a win-win situation. Russia’s grip on the European Union gas supplies will continue well into the future despite the United States’ attempts, supported by the likes of Poland, the Baltic States, Georgia and Ukraine to undermine Russia’s supplies to the European Union. Sputnik: Let’s talk about the economics of the gas supply. How competitive is the US LNG against prices that can be presented by Russian gas? Mamdouh Salameh: US LNG cannot compete under any circumstances with Russian piped gas to Europe. Russia has a fully integrated gas industry underpinned by the world’s second largest proven reserves of natural gas, the cheapest production costs, does not have to convert its gas to LNG to ship it to Europe and already has a monopoly on export pipelines to Europe — even without Nord Stream 2. Russia provides roughly 40 percent of Europe’s gas needs and that dominance will continue well into the future.