Rising oil production in the US and slowing oil demand growth in the rest of the world were expected to bring Brent oil prices below $100 a barrel, but supply disruptions in the Middle East and North Africa have kept them from happening. Now that ISIS is holding substantial territory in Iraq, Raymond James analysts have increased their estimates for 2014 and 2015, but they also warn that there is a huge range of possible prices depending on how Mideast conflicts and US politics play out.
“Because of this increased uncertainty regarding Iraqi oil supply, we are raising our 2014 Brent oil price estimates from $102 to $110 and our 2015 Brent estimates from $95 to $110. Likewise, we are raising our 2014 WTI estimates from $90.25 to $102 and our 2015 WTI estimates from $75 to $85. It is important to note that our confidence in these new estimates is extremely low,” write Raymond James analysts J. Marshall Adkins, Pavel Molchanov, Cory J. Garcia, and John Freeman.
Mideast oil supply disruptions hard to predict
OPEC supply disruptions in Nigeria, Iraq, Libya and Iran (the first three due to conflict, Iran because of sanctions) have grown since the beginning of 2012, peaking at the end of last year, and this is probably the biggest source of uncertainty for oil prices going into next year.
ISIS is directly threatening Kirkuk, which produces about 400 Mbpd (thousand barrels per day), and the Kurdistan region, which produces about 200 Mbpd. It’s hard to imagine the Sunni extremist group gaining a foothold in the predominantly Shia south, but a protracted civil war could still disrupt production across the country and the Raymond James puts the worst case scenario as a 2 MMbpd (million barrels per day) drop in supply from Iraq.
On the other hand, if ISIS is driven out of Iraq, tensions cool in Libya, and ongoing negotiations with Iran bring its oil back to the market, Mideast supplies could jump by 2 MMbpd as well. Saudi Arabia may be able to adjust its own production by 1 MMbpd in either direction, but the potential for a big swing up or down can’t be ignored.
US export policy will determine the WTI-Brent spread
The other factor is falling light crude capacity in the US. Crude oil exports are banned in the US without a special exemption from the Commerce Department, but local supply is quickly catching up to local refinery capacity and should overtake it by the end of 2015. You can already see the effect of this in the WTI-Brent spread, which has typically been positive (and close to zero) but turned strongly negative in early 2011.
The Raymond James, which was written two days ago, predicted that “the U.S. oil export assumption described above is our belief that the U.S. will actually allow for the export of condensate within the next 12 months,” which actually happened today, Bloomberg reports, but the report also says that “it is important to note that this will not solve the structural problem for US oil prices. In fact, it is our belief that allowing the export of these lighter condensate barrels would only push out the potential collapse in U.S. pricing by six months.”
Considering the Commerce Department acted more quickly than the Raymond James report forecast, it’s possible that light crude exports will get the green light more quickly as well, but once WTI prices collapse there will probably be a lot of political pressure to get exports going.