Hello there and welcome to Vienna to the OPEC headquarters.
This is the edition of Oil Market Inside coming to you on the occasion of the 169th OPEC Conference and we're coming to you here from the press room at the OPEC headquarters. Here of course the venue where you can many of you will be familiar with listening to the OPEC's decision always after the OPEC meeting where the press conference is held right here. So here the very heart of OPEC we're here to look at oil market inside and my panel of experts here to help us some.
Let me quickly introduce you to them and we'll get right down to it. Jason checker joins us from the US. Jason, of course, is the president of Prestige Economics from Texas. We are also thrilled to be joined by Gaurav Sharma. He is the business editor and an analyst with IBTimes. Thank you so much for coming to join us and from Austria from Vienna here David Wech. Thank you so much for joining us the managing director of JBC energy.
Now David, I'd like to start with you and when we look at the strength that has come back into the market and come back into the oil price over the last six months the first half of the year pretty much behind us now. When we look back what has been the momentum that has actually been driving that?
David: On the one hand there's of course very strong demand for oil. We had about 1.7 million barrels for the last year. We expect to see a 1.3 million barrels per day after regular upward revisions in the recent past. On the other hand, on the supply side, we see the first impact of lower prices with US shale oil being in decline. There have been a number of outages recently so basically the market is getting towards balance and this is getting quite some attention the market and looking forward there is of course a concern that there will not be enough investment in future supply.
Host: And all of those matters we are certainly going to touch on. Gaurav, though when we look at the fundamentals of the market absolutely important too but also the sentiment of the market is beginning to change what do you think?
Gaurav: Well the kind of feelers that you get from the wider market is that most players expect a fair bit of rebalancing not just next year, but for the next three years. So taking that into context it will determine the direction of the market I concur with my colleague that shale is seeing a fair bit of depression; we're seeing about 70 order bankruptcy stateside this year alone. So, there will be a production correction and that we are on a wider market sentiment.
Host: Now Jason I know I always have you as the spokesperson for the US when it comes to what's going on the market there. What you're watching obviously the world but watching the US market very carefully and a lot of weight has come off; the market lot of production has come off; bring us up to date with what's going on in the US?
Jason: Well you know we've seen about 425 - 450,000 barrels per day come off in the US just since the beginning of the year so that's a big drop and as we look forward even if prices remain where we are now a little higher around fifty dollars a barrel, is still a price point at which you're going to see continued bankruptcies; you're going to see layoffs, defaults; all kinds of problems in US shale. So you're going to continue to see those problems even if we were made at this price point and to concur with what Gaurav and David have said, as you look out two or three years, I think there's a lot of upside for prices because you have the potential for reduced Capex in the short term to limit prices as global demand continues to rise.
Host: But when we look at oil demand, also Jason, we're seeing that the oil demand growth the additional demands growth. That has actually come off quite a bit really in the past two years I think maybe about two million barrels, really.
Jason: Well, what will be the main demand growth this year, I think we will see 1.5 million barrels per day extra but you know I think you're going to see low prices cure low prices here and that should be solid. I know we're seeing in the US very strong demand with that record miles driven a 12-month moving total bases and with that since December 2014. We've seen records month after month after month; summer driving season this year is going to be really strong and OECD demand has been something that's been in decline since 2005 but you know this pop and demand is really being generated by those low prices and that's going to help bring the market I think back into balance.
Host: Now, the strength of we've seen come back into the market David and we've seen that price come up there around 50. Many of the shale operators in the US, you know, when we look at them, they may be coming back into the market; they started looking at prices; but we've seen a bit of resilience in some of them. What price level do you think that people would want to come back or take the risk about coming back?
David: Yeah, one has to differentiate it. There's simply no single price level. We would argue that some shale or place looks fine at even thirty dollars while others look fine at forty dollars others will probably need perhaps sixty to seventy dollars to come back. So there is no straightforward answer; what can be said is that so far the decline has generally been less than what has been expected including the American Energy Administration. So, new technology, better employed technology, falling costs all across the board are helping basically to bring this prices down also to some extent.
Host: What do you think, Jason?
Jason: Well, I think that I would agree with David's point about there's different price points at which you're pulling the oil out of the ground and this is I think where we need to differentiate between operating expenses and capex (capital expenses) and on the up-back side there's a very big difference between what it costs to pull the oil out of the ground a lot of the shale players are in the money at this level.
But, the problem is on the capex side, where are you going to be able to make additional new investments and back in November 5 of 2015 the Fed, the FDIC and the office of the controller of the currency three, critical regulators in the banking side, issued a strong warning about risk to the economy because of leverage landing in oil and gas; and this warning was really important because it sent a message to the banks to be very careful about issuing additional debt in the space which means if you're going to get more drilling the capex has to come from somewhere and it's going to likely be shut out on the banking side for some time; means it has to come from other sources of investment so while upback-wise companies might be doing better, capex-wise, they still might not have the money to drill those wells and we're looking at a lot of operators that could potentially lose payzone leases; the ability to drill in some of the places where you've got good rocks, you might even lose those because they can't get the money to drill those wells not even at fifty dollars.
Host: And you recently got back from the US, I mean what did you find?
Gaurav: All the feedback that we have from the law firms and you need a lawyer to sign off on the documentation for drilling permit, is that drilling has a side has completely grown to a halt. You know, that's what we are noticing, and right now the focus of a lot of small independent state side is to just get their house in order, to get their finances in order, not all of them might be able to achieve that, and of course to agree with David there's no single price point. There are some folks who would be comfortable thirty dollars twenty-five dollars but a number of the French players, they are in a whole lot of trouble.
Host: Now we're seeing some strength in the market; we're seeing some demand strength. In the last few years seen demand strength has been there. Obviously there's been some oversupply but when we look towards you know the medium term and we look at the demand and we look at the growth that may have slowdown in China and the Asia-Pacific too - but there is still, there still growth in the demand. Isn't that so Dick
David: Yes I mean oil demand generally has two strong pillars of support; the one is private transportation whether that is in cars or by plane and the other one is the petrochemical industry; and these two pillars of support we don't see how that would go away quickly and so at least until 2020, we see quite some support post-2020 in the private trying side it will be interesting to see how much electric cars can come into the market but gasoline will most likely remain a very important source for a few going forward. And from that point of view there will still be a good future for oil, but the industry will slowly but truly transform at one point of time from a growing one into a stagnating and ultimately declining one. The big question is whether in such an environment you will be able to attract sufficient investments.
Host: Again the investment side very important but stay with us here on China at the moment and the growth that we are seeing there. Obviously it has tempered quite a bit in the last few years. It's steadied but there is still growth there we look at the strategic reserves as well. China has been topping that up.
Jason: Well that's why they have been adding to their strategic reserves and their oil demand growth is likely to continue that's because of an emerging middle class and that is to get to what David was talking about; that's an aircraft carrier that's turning; you're not going to stop that trend. The manufacturing side China has been very weak. The data through May reflect manufacturing recession in 17 of the last 18 months.
You see month-over-month contractions for a year and a half. But, even though that's been going on that the oil demand growth in emerging middle class is still going on because manufacturing is 31 person of the economy and the other sixty-nine percent is on the consumption side and that rising middle class is going to continue to demand more crude; is going to continue to demand more cars. What that does to the overall Chinese economy is up for debate and there are downside risks for the Chinese economy as the whole, but this long-term trend of continued fuel consumption by individual consumers as you have this, massive emerging middle class, that's not likely to change anytime soon.
Host: Gaurav, when we look at demand and where we looking OECD meeting in Paris at this week as well and they're saying what that is again OECD as stagnated I mean we pretty much know that when we look at growth at around three percent and that's what we're hearing there, but when we look to demand hub, so to speak in the potential for demand, where do you see it coming from?
Gaurav: From a supply-side standpoint; if you look at all these guys sitting in front of this all the models who is procuring what where, I think, to add to what Jason has already said, I think India is another big hope. They're building strategic petroleum reserves off their own of course the data is not in public domain but you can pretty much looked and work out what they're looking at from the shipping dispatches. So India is another big hope and if you look at the Big Five: Japan, South Korea, India, US and China; right after China, I would say near the rate, a great big hope the market. Sadly enough, the Japanese' intake is not as great. In fact, it's in decline. But I would say, India will more than make up for that.
Host: And again that the monetary issues in Japan; there, they're looking closely at that. At the moment, it would be interesting to see, "Are we coming to the monetary issues?" and the end that, be it Japan or be in the US, as well. How's that going to impact?
Jason: Well, you know, I think that obviously was going in the monetary policy we're at an inflection point before we go to that I would just say one thing about what Gaurav just mentioned and that if you look OPEC publishes their expectations for forecast for the next 25 years for where oil demand is coming from. And over seventy percent OPEC is forecasting is coming from India, China and other Asia. So this is where this is all coming from. And monetary policy and in Japan, I think there is going to be you know maybe less critical for the oil market.
I think that's even true with the ECB which I think is eventually going to wind down its quantitative easing. You've seen improvements in manufacturing in Europe and although people often talk and here in the States, very quick to say that manufacturing growth in Europe is quite slow but you know, for the 9 or the past 10 months through April, European manufacturing improved a month-over-month at a quicker pace than US manufacturing or improved while US manufacturing actually was contracting. So things in Europe are getting better.
In the US, you have a risk of Fed-rate hike. I think they're going to wait for July the June Brexit risk, which I don't think there will be a Brexit, but the risk to the entire financial market is something that would make the Fed-way. The point is the Fed is in a tightening mode and the other central banks are still in a highly accommodative mode. This is something that could make the dollar strengthened and caused a bit of some choppy trading and pricing for oil and other commodities through the mid-year but it's also something that's going to engender some slowing of growth later this year next year in the US.
Host: I mean ultimately David stated that global economy and any of the components within that any constant is so important for this industry, isn't it? I mean, it's what they're looking at constantly looking at the horizon to make sure that there will be growth in the economy. How confident are you in terms of growth, economic growth, globally in the next year or two?
David: Yeah, difficult to tell. I'm not too pessimistic. I think most important things have been said here. I have always my little doubt when people are very pessimistic about China just by looking at oil demand figures; yeah, they are rising so strongly in terms of gasoline consumption in terms of Petchem feedstock consumption; I think the Chinese economy is simply as anyway indicated in a transition phase pretty far problem that transition phase from an industrial export-oriented economy to a domestic consumption economy and that looks healthy, India looks healthy; Russia is doing better than expected. It was not particularly good but at some point of time we will also turn around. So yeah I think at some point of time we have to face again probably downswing, and we might actually at the moment be in a better state that what people were thinking particularly for the back at the beginning of the year to move the market and I was always wondering where is that coming from because if you look at the figures on the oil market side they're pretty healthy. So, at some point of time, we will move back to it's a recession mode but perhaps not yet next year.
Host: And again that's what everybody is really looking at; just keeping some strength in the market and keeping that demand. looking at the US in terms of, you know, the demand figures that are there and looking at the growth and again it's not all spread out even and when we look at the manufacturing numbers various numbers coming out of there it's not an even picture coming from the US either, is it?
Jason: No it's not that. There are pockets of recession and you know there is a US oil and gas. To give you some idea, in Texas, for example, in December 2014, were about 320,000 people employed in oil and gas and the most recent months numbers from March show there were 230,000 jobs in oil and gas; you lost 90 thousand jobs; almost a third of the jobs in the oil and gas base. That puts you back to job levels it at 2011 levels.
Essentially any jobs created in the shale period are gone. Manufacturing has been quite weak; industrial production year-over-year, that's very weak; there are also some concerns about, I think, auto sales because retail x-autos is at recessionary levels but if you look at auto sales have been very strong but that's because of suffering auto-loans. So there are some mix things, rail car loads are weak, Trucking's been weak; anything industrial has been weak, but, manufacturing is only thirteen percent of US GDP, it's a very small number especially where in China, it is thirty-one percent, but these are providing head winds and I still think that this is, you know, a general concern for the global economy.
Last month or in over a month ago now in April, the IMF released their growth forecast in the press conference. They were asked whether the global economy was in a crisis. One of the heads research said "We're not technically in a crisis; we are on alert for a crisis!" A number of very inspiring statements but again to David's point, if we look at oil demand, oil demand growth has been good and the biggest driver there is "low prices cure low prices" and so you're still seeing solid growth there, while things look less good for copper or for other industrial metals or for general global economic growth which this year global economic growth could be below 3% which is consistent with a recession level even though it's still 3% but for the global economy not a great year. Oil demand growth could be very good.
Host: When we look at the state of investment and, we take into account to the state of the employment market and all of that to, the investment that's come off the market many of the analysts saying 1.5 trillion in the last two years. Gaurav! I'd like you to look at this. That's a lot of money off the market and a lot of money that probably will not come in. Where is the big danger now that that money is off the market; investment has really been taken and our projects cancelled, delayed and when we look maybe a year or two down the road; I mean, would that indicate another price spike? What's the big danger of this money gone off and the fact that maybe investment doesn't come back?
Gaurav: It is a little bit tricky. Now, if you look at this figure 1.5 trillion really we will be surprised by that figure too. So between June 2014 and today's it represents a 40% down there. So, if you could take it on an even keel most of the non-OPEC production has borne the brunt of it. Now I've done and I'm not saying I'm doing shale bashing but there's a fair bit of malaise in the wider market. Now let's switch tag let's switch tag closer to close to England where I am based and if you look at the North Sea one in seven barrels is getting produced below cost; there is lower investment. Now another figure out in the market is that about 30 billion dollars' worth of decommissioning would be required in the North Sea over the next 10 years. Now when there in the figure of decommissioning exceeds the figure of investment then you know the jurisdiction is trouble
Host: Jason! Is that an issue of investment?
Jason: Yeah, I see it absurd when we look at a couple of years or so I mean I think growth in the US and globally could be spotty over the next year, year and a half, but if we look out into 2018 and beyond, there's a lot of upside risk. I mean the number of discoveries in last year is the lowest it's been in 50 years for oil. There are a number of new discoveries. You know, this is that the level of investment is going to be very weak and I think in the US, again you have the financial services regulators, the Fed the FDIC and the OCC, that issued very strong warnings to banks about whether they should be investing in the space. That warning was issued on November 5 of 2015 when the closing price of WTI was $45.20. Right? In the first quarter it was the price the average price was thirty percent below that and we're just now a few dollars above that. So, we're just now back to a level that made the regulator's very nervous about the banking system which means the banks are going to be loath to put a lot of money into the space on a debt basis; which means you're going to look at money coming into the space from private investors private equity. They're going to want very high rates of return which means you might need to see the price go a bit higher before you see a lot of money come in as a an influx of capex which again delays that additional marginal supply you need after the market comes into a balance.
Host: How many of the OPEC countries have stayed with their projects and continue to roll them out but again that the lack of investment, when we look at the wider picture. David, how dangerous is that when we look to maybe a year or two down the road and the possibility of another price spike?
David: Yeah, I would tend to see the little bit longer term issue. I would just like to say a few words. I agree but basically that the majority of people looking at the oil market will say there is a clear risk that there's too little investment. On the other hand I would like to point out that resource availability in my point of view is definitely not an issue even they're not that much new finds but there is a lot in the ground we know off.
Host: When we look at this and market at the moment in terms of the investment, I mean, okay there's a lot off the market maybe some people are reviewing that and maybe putting more money on. Some of the OPEC countries still staying with some of their investments but again they're cutting costs and they're looking towards efficiency right across the board here. But again the longer term risk taking that money out of the market.
David: Yeah, the point is that it's not that easy to invest for companies because there are so many uncertainties and if you look a little bit more into detail you may also come to the conclusion that there is still enough oil in the ground and in the pipeline so it's not the straightforward thing even though it's an evident idea that lack of investment now will cause a spike here. So there the point is simply that even though the environment might generally look supported for investing people might not go ahead here also because the price tax for investments in the oil industry are huge. Now, this is all over the shale is coming in because in the shale fields they are much lower the price text so that might even take away further initiatives to drill a deep water or go Arctic and so on and the question is and I can't fully give you an answer on that is whether we will need this resources and what people will be very cautious to invest and so of course we can come into a situation where the market is tight. There are long cycles between the investment decision and the actual oil being brought on stream for the big project something like 10 years even for shale probably something like a year and more so the point there is if pretty much all producers around the world are currently producing flat out. We might not have an equation to shelter against the wall via strong upsetting prices.
Host: And again, looking at that to the spare capacity is something that you're quite concerned about up there really aren't you?
David: Of course, I think there is as we had a long history there is simply that would be a huge benefit in the organization like all the OPEC holding its spare capacity because it will protect the market against the upside. It's not only a question about the physical availability of oil it simply already the knowledge about such capacity being available will keep speculators in the market traders a little bit in check yeah because without such a concussion you can basically it's very difficult to find to the limit on the outside forward prices.
Host: Now and we do have to start wrapping this up and go out when you look at again the spare capacity issue the investment issue I mean there's a lot that still can be done out there but again there is that volatility and there's the uncertainty in the market that seems to be in a way what's holding people back.
David: In these volatile climates, I think we should return back to the subject of investment because we keep constantly talking about efficiencies in the business and in some cases there are plenty of case studies out there where central is a reduced cost from something like 25 million dollars right down to three to four million dollars and that kind of efficiency should be appreciated but you would see that a lot of people feeling pressure from that would probably be the oilfield services guys who have to give more competitive contracts to have to do things as per the parameters set by the driller. So, investment is a very interesting subject and is going to evolve as the market progresses.
Host: And everybody is feeling the pinch. I'm gonna leave you with the last word on this Jason. And you know a lot of challenges out there of course but as we look ahead towards the second half of the year where are the bright spots?
Jason: Well, you know, I think the bright spots are you still going to see Europe manufacturing here like they continue to improve growth continuing to improve, remain solid, job means improving; so I think Europe gets a little bit better I think that's a bright spot. I think for oil demand growth in emerging markets, China, India those can remain solid global demand; US demand should be solid because of the low prices summer driving season should be really strong. I think those things are good moving forward. I think as we look further out to get to something that Gaurav just mentioned as we think about drilling, you know the additional oil could be drilled but if the people leave the space you know if I mean again if I think about just what in Texas for a third of the workers are now gone if you need to bring them back relatively quickly what are you going to do? So that could be a challenge moving forward and that could put cost back in to the system. So I think that there's going to be a circular feedback loop there and I think also future expectations of feed through to the present right you also have because of the fork of the ability for future expectations be priced into the present so I think that we do see some upsides for the underlying for the price of oil but I think for global growth they I think things for a little bit more touch and go for the next year and a half and the same for the US.
Host: But we have to leave it there so gentlemen thank you so much for joining us Jason Checker Gaurav Sharma and David Wrech. Thank you all so much and again that was it this edition for Oil Market Insight and thanks so much for being with us for this and as you can see there it's a volatile time very uncertain time as we start the second half of the year 2016 so here on the occasion of the 169th OPEC conference, we're gonna leave you from Vienna. Thank you so much for being with us and stay with OPEC.org for more information. Thank you!
By SHANA
# Tags
