Special Focus on Independent Oil & Gas
“Price Negative” Scenarios
The key risk to the downside is European demand. The Eurozone debt crisis is leading to the introduction of austerity measures throughout Europe. Oil demand in the EU in 2010 was about 13.8mmbpd, or c15.8% of global demand. Over 78% of this is from countries in the Eurozone.
However, over the last decade, oil demand in the EU in general has been declining, by about 0.7% per year, due to higher prices and increased substitution.
In a full recession scenario, it is not inconceivable that we would see oil demand from the European Union falling by over 3.5% in 2012, or c500,000bpd. Oil demand in peripheral countries such as Russia and Turkey could also fall, as a result of knock-on effects of a recession in the European Union. The total effect of a deep European recession might be to reduce expected demand by as much as 750,000bpd. A “hard landing” to economic growth in China could also cause a reduction to demand forecasts. The effects of lower economic growth on oil demand are hard to quantify but could be large enough to materially affect global oil markets.
There could also be other upside supply surprises, of which we set out the most likely ones below. A faster than expected recovery in Iraqi production
The emergence of a modus vivendi between the Kurdistan Regional Government and the Iraqi central government, to allow increased exports from Kurdistan
Faster than expected recovery in Libyan production. Table 2: Maximum Disruptive Effects of the Scenarios Described Above
Disruptive scenario
Blocking of the Straits of Hormuz Disruption of Saudi production Disruption of Iranian production Break-up of Iraqi government Civil war in Syria
Increased Egypt/Israel tension Increased internal dissent in Russia Increased exports from Kurdistan
Hard landing to economic growth in China
Faster than expected recovery in Iraqi production
Faster recovery in Libyan production Deeper recession in the Eurozone
Maximum effect (mmbpd1)
Source
-15.5 Average daily traffic level. US EIA -7.2 2010 net exports from BPSR -2.4 2010 net exports from BPSR -2.0 WS estimate of 2010 net exports
Higher risk premium Higher risk premium Higher risk premium2
+0.25 Westhouse Securities estimates +0.25 Westhouse Securities estimates +0.50 Westhouse Securities estimates
+0.50 Westhouse Securities estimates +0.75 Westhouse Securities estimates
NOTES: 1. Minus represents loss of crude availability. Plus represents increase in crude availability.
2. We do not expect increased internal dissent in Russia to affect oil exports, unless there is a very serious challenge to the government’s authority. Exports in 2010 were around 7.1mmbpd (Source BPSR) SOURCES: As described above. BPSR =BP Statistical Review of World Energy June 2011.
Oil Price Risk Premium Likely To Remain
In the absence of major events, we consider that the Brent oil price should stay in the $100-120 per barrel range in which it has been trading since the end of April 2011.
Although the fundamentals for a “surprise free” oil market are looking slightly weaker in 2012 compared to 2011, a significant “risk premium” in the oil price is likely to remain.
Drillers and Dealers :::
::: February 2012 Edition
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