A balanced global crude oil market likely will remain elusive into 2018 because so many underlying dynamics have changed in the last 10 years, a leading analyst said. The outlook is worse for LNG because markets are saturated, prices are depressed, and economics are unfavorable, Fereidun Fesharaki, founder and chairman of FGE Consulting Group, observed on May 23.
“Oil is like dating. Gas is like getting married. You have to know what you want going in, because you sign 20-year deals. Buyers don’t always want to commit for that long because there’s so much gas and spot prices are low,” he said during an address at the Center for Strategic & International Studies.
The problems began when crude prices shot past $100/bbl in 2000 and stayed in that range for a few years, Fesharaki said. “Everyone began to think it was the index, but the price had gone up for no reason. Everyone from producers to environmentalists liked it because it made nearly anything possible, but it couldn’t last,” he recalled.
He said that Ali al-Naimi, Saudi Arabia’s oil minister from 1995 to 2016, increased the country’s production to drive new competitors out. Many left when prices fell to $35/bbl, but unconventional production began to grow. “Six or seven years ago, when prices were $50/bbl, every OPEC country ran a surplus and they all were happy. Now that they are back at that level, everyone is unhappy because there are so many other producers,” Fesharaki said.
“My understanding is that OPEC has decided it will do whatever is necessary to keep prices above $50/bbl. It might not be enough,” he continued. “Production outside OPEC could be higher than it expects. It’s scary to see how much growth is coming from more efficient rigs and operations. The Kashagan offshore field in Kazakhstan could be a sleeping giant that grows substantially in the next 12 months. US production continues to rise with prices at $50/bbl.”
OPEC could vote at its May 25 meeting to extend its current agreement, but its more influential members might push in another few months for deeper production cuts in the 500,000-700,000 b/d range and call a special meeting if prices don’t improve, Fesharaki suggested. Saudi Arabia also could decide to reduce its own production, he said.
Strong gasoline demand
“There could be problems beyond the first quarter of 2018,” Fesharaki said. “The good news is that oil demand is strong because prices for gasoline, which represents 36% of total global demand, are so low. As long as oil’s price is below $60[/bbl], global gasoline demand will be strong. It’s driven by the desire to own cars in emerging markets and to own bigger cars in the US. That’s why OPEC has extended its agreement. But it’s not certain whether an improvement will come quickly.”
A lack of reasonably current data outside the US is not helping OPEC efforts to balance supply and demand worldwide, he said. “Today, the price of oil in global markets is driven only by inventories. For OPEC, the key issue is to show numbers there are going down, which they apparently haven’t,” Fesharaki said.
“Onshore, the US is the only place that provides up-to-date data, followed by the [Organization for Economic Cooperation and Development] a few months later. Expectations that inventories will be drawn down aren’t happening because production from so many other places is reported late, and may be questionable,” he said.
He questioned whether a balanced global oil market can be achieved anytime soon. OPEC now may want to keep prices from going above $55/bbl. “It can be steady for a year or 18 months, but production will need to be slowed down for a longer period,” Fesharaki said. “We believe the Saudis won’t go below 9 million b/d, but they also have the ability swing upward by 2 million b/d.”
When it came to natural gas in general and LNG in particular, the analyst who led energy research at the East-West Center in Honolulu from 1979 to 2013 said soaring gas production worldwide and a glutted LNG market are making many projects uneconomic and overseas sales difficult.
As an example, he said the US has become a significant liquefied petroleum gas exporter, but global gas prices are too low for it to be competitive with foreign suppliers. “You need $65-70/bbl oil prices to make US LPG exports economic because they go to international markets where they are priced on the basis of crude oil prices, which are depressed,” he said.
A different pricing basis
“In the US, we have 67 million tonnes of LNG capacity being sold, but it’s mostly going to middle men,” Fesharaki said. “US prices are based on known parameters, but they compete in Asia and Europe with crude prices, which are low. Somebody has to lose money. Many customers who have signed US contracts are credible, legitimate companies that will take what they’ve contracted. But there are others who won’t, which will create problems.”
He said that since the Asian LNG market is oversubscribed, the only logical destination for US exports, besides Latin America, is Europe where gas is selling for around $4.80/MMbtu, and Qatar and Norway are dominant because they are closer and their transportation costs are lower.
Very few proposed US LNG export projects are going ahead as a result, Fesharaki said. The Golden Pass export project in Sabine Pass, Tex., is one of the few that is because it is 70% owned by Qatar Petroleum and 30% owned by ExxonMobil Corp., he said. The US Department of Energy recently gave it clearance to send LNG to customers in countries which do not have a free trade agreement with the US (OGJ Online, Apr. 26, 2017).
The proposed Jordan Cove liquefaction and export project in Coos Bay, Ore., suffered a setback in 2016 when the US Federal Energy Regulatory Commission denied its application for a permit, partially a response to local opposition, Fesharaki said. Its sponsor, Calgary-based Veresen Inc., received FERC approval to begin a fresh application in February and has scheduled open houses for the public to learn more about the project, ask questions, and meet employees of the terminal and liquefaction plant and its Pacific Connector pipeline.
“Every US LNG project is backed by private equity that goes $300-400 million in the hole to start. Many can get FERC approval and still have trouble because there’s substantial local opposition,” Fesharaki said. “I think many of the projects that have been proposed won’t be built because they’re so heavily leveraged. LNG exports’ time may come in this country, but their time is not now.”
LNG projects outside the US also are having trouble, he went on. “Australia has three big projects that have been built on its eastern coast that have turned out to be a disaster. Not only are the costs high, but they run out of gas. Consumers in Australia are paying $15/MMbtu, but LNG is selling in Asia at $5[/MMbtu]. Where systems are connected in the US, they aren’t always in other countries,” he said.
Contact Nick Snow at [email protected].
Nick Snow
NICK SNOW covered oil and gas in Washington for more than 30 years. He worked in several capacities for The Oil Daily and was founding editor of Petroleum Finance Week before joining OGJ as its Washington correspondent in September 2005 and becoming its full-time Washington editor in October 2007. He retired from OGJ in January 2020.
