KPMG’s oil and gas market update
In December 2014 the global crude oil benchmarks took another dramatic fall in November as expectations that OPEC would maintain production levels were realised (c. 30/mbpd).
Over the course of the month ICE Brent traded as low as $69.78/b, a 4½ year low. NYMEX WTI meanwhile broke through a key notional support level at $70/b dipping to $65.69/b immediately after the OPEC announcement. The OPEC reference basket (ORB) price averaged $75.57/b in November – and is set to average out the year below $100/b, the first time in four years.
Market sentiment was dominated by OPEC in the build up to the most eagerly-awaited get-together in recent memory. Saudi Arabian oil minister Ali al-Naimi was the focal point of media coverage ahead of the November 27 meeting – having being recently accused of initiating a ‘price war’ with the US after slashing the official selling price (OSP) of Saudi Arabian crude oil.
Presented below is a time series showing the volumes of social media posts discussing “OPEC” over the past three months, set against the changing price of crude oil. Key events, including the recent decision by OPEC to maintain production are marked, with the resulting changes in price highlighted.
Oil price forecasts taken mid/late-November showed further long-term price pressure. We anticipate further downward revisions for December’s forecast following the recent OPEC- driven sell-off.
Despite OPEC’s decision to maintain production, data in a recent OPEC report suggests production cuts could be imminent. According to the report, demand for OPEC crude oil for FY2015 is expected to be 29.2 mb/d – almost 1 million barrels less than current production levels.
Demand and supply fundamentals have played a significant role in the recent crude oil sell-off. We see “over-supply” continuing to be the hot topic of discussion in the market over the coming weeks – particularly US shale oil production volumes.
Long term estimates for Henry Hub gas were revised down by analysts in November on stronger domestic production and ample supply for the approaching winter.
US
Henry Hub for prompt delivery was supported by colder-than-normal temperatures across the US in November. The front month contract traded as high as $4.544/MMBtu closing the month slightly higher than October.
UK
NBP Front month contract edged higher on seasonal effects of colder temperatures and unplanned outages in Norway. The December contract up to expiry (27th Nov) closed at 58.58p/th, up 5.4%.
Japan
The JKM contract, a spot reference for Liquefied Natural Gas cargoes assessed by Platts, averaged $10.77/MMBtu in November, the lowest level since February 2011. The fall in price was largely attributed to inventory builds in Japan and South Korea supressing the demand for incremental volumes.
Emma Wild, head of Upstream Advisory, KPMG UK, said: “OPEC is protecting itself in the longer term. Losing market share to the US would limit OPEC’s ability to influence oil prices in the future. OPEC has taken a gamble that shale oil production will reduce as a consequence of low oil price and high production costs. This is a high risk strategy and could inflict more pain on a number of already-disgruntled OPEC members, not to mention Russia.”
Anthony Lobo, head of oil and gas, EMEA & ASPAC, said: “The recent price fall will add further pressure to exploration budgets, as upstream players batten down the hatches and reduce their exposure to high risk prospects. The ability of some companies to service their debt in this market may also be impacted by the lower cash flows. However there are still investment opportunities to be had for those with significant cash and debt capacity.”
George Johnson, executive advisor oil and gas, KPMG UK, said: “This is an opportune moment for oil-intensive users – such as airlines – to capitalise on the low price environment and secure long-term price protection. Oil producers on the other hand face a tricky dilemma – hedge at the current market rate – or postpone and potentially face further misery.”
