Energy Outlook Q3 2014

A grim summer and a mildly-mannered oil market


  • December-01-2014
A grim summer and a mildly-mannered oil market

In many ways, it has been a grim summer – and I am not talking about the weather. The West and Russia have increasingly found themselves at loggerheads over Ukraine, where fighting in its eastern region continues unabatedly between government troops and pro-Russian separatists.

With little progress made towards resolving the crisis, Europe and Russia have entered into a titfor-tat sanctions war, whose outcome is hard to predict. For Europe, the situation is particularly threatening given its dependence on Russian gas supplies being piped through Ukraine.
Meanwhile, in Syria and Iraq, the Islamic State has taken control of vast areas in both countries and announced the birth of a caliphate that’s built on sheer terror and oppression. The group is already controlling essential resources, including oil fields and wheat supplies. And even though the US has decided to intervene militarily, carrying out air strikes on Islamic State positions, the threat is far from over. The militant group remains dangerously close to hydrocarbon-rich Kurdish
territories and could potentially threaten other key energy infrastructure in Iraq, including the strategic Kirkuk-Ceyhan oil pipeline.
Add to this mix the ongoing instability in other key energy producing countries such as OPEC members Libya and Nigeria, and one would be forgiven to expect oil markets to be more than a little jittery, if not outright panicked. Surprisingly, the market reaction has been rather mild mannered. West Texas crude hit nearly $108 a barrel in mid-June, breaking out of its three-month old $99-$105 trading range, but prices have since come down to below the $100-a-barrel mark.
The reason? A great deal of supply in the markets, partly due to rising US output and Saudi Arabia pumping at close to 10 million barrels a day. At the same time, demand remains subdued, with the Paris-based International Energy Agency in mid-August cutting its oil-demand forecast for 2014 by 180,000 barrels a day due to weaker economic growth. Going forward, the supply side is set to receive another boost with Canada, Mexico, Brazil and Kazakhstan all set to see significant production growth, while the demand outlook remains somewhat uncertain amid sluggish global economic conditions.
With this in mind, one thing is for certain: the energy industry will have to plan for all eventualities – and hope that this winter will be more pleasant than the summer.